Political numbers in the U.S. have dominated headlines this week. Another important set of figures has received far less attention.
The Trump administration has spent much of the past year arguing that capital leaving China was a sign of flagging confidence, which would enhance the U.S.’s leverage in trade talks. Until recently, there wasn’t much evidence that was true. Now there is: investors should sit up and take notice.
Lost in the flurry of election coverage this week was a pair of important numbers from China. The country’s third-quarter balance-of-payments data showed the first net investment outflow since 2016. Data released Wednesday showed Chinese foreign-exchange reserves dropping $34 billion in October, the biggest monthly fall since late 2016.
China is still far from the sort of sustained outflow pressure that drove its reserves down by nearly $1 trillion in 2015 and 2016. But this latest data shows the investment environment has deteriorated markedly in China in the past four months. And since China’s earnings from trade are also flatlining, that means more pressure on the yuan—and even less space for big monetary stimulus at home.
China’s net trade earnings have been weak all year. But until very recently, big investment inflows had offset this. As recently as June, foreign holdings of Chinese treasuries were rising at nearly 80 billion yuan ($11 billion) a month as fund managers eyed China’s inclusion in a key global bond benchmark. Foreigners are still buying Chinese government debt, but the pace has slowed dramatically. They added just 20 billion yuan in October according to Wind. Net foreign direct investment was also close to zero in the third quarter, after strong net inflows in the first half.
The third-quarter figures are preliminary. And a stronger dollar, which reduces the value of non-dollar reserves, did make October’s FX reserves figure look worse. But slowing bond market inflows are harder to dismiss—and weakening foreign investment overall wouldn’t be surprising given rebounding inflation, slowing growth, and a stock market in full retreat. Price gains in China’s red-hot real-estate market, a key factor keeping investment capital at home, also slowed in September.
Foreign interest in Chinese assets has been a key—and an underappreciated—factor that had slowed the yuan’s decline this year and permitted modest monetary easing by Beijing without triggering big net capital outflows. If foreigners are now having second thoughts, it portends a much tougher period ahead for China’s currency and policy makers.