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US Treasury Adjusts Yuan Stance, Sees China Capital Outflows to Increase

US Treasury Adjusts Yuan Stance, Sees China Capital Outflows to Increase

Daniel Dubrovsky, Contributing Senior Strategist


Talking Points:

  • The Treasury estimates Chinese capital outflows of $250 billion in the first half of 2015
  • Views China’s Renminbi remains below its appropriate medium-term valuation
  • US Treasury highlights IMF’s concerns and solutions for China’s economy

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On Monday October 19, the US Treasury released its report to Congress on International Economic and Exchange Rate Policies. In the report, the Treasury noted that non-Foreign Direct Investment (FDI) capital outflows from China are estimated to be around $250 billion from January to June 2015. Outflows further reached $80 billion in July, around the time of the Chinese equity slump. By the end of August, when the PBOC introduced its new Yuan reference rate policy, the report calculated a further flight of $200 billion from country. This brings total estimated capital outflows in the first 8 months of 2015 from China to roughly $450 billion.

On the topic of the currency, in its previous report, the US Treasury mentioned that the Yuan was significantly undervalued. This was replaced with the softer view that the Chinese Renminbi is below its appropriate medium-term valuation. After the new reference rate policy was introduced, the USDCNH surged as much as 6 percent, but is now a more restrained 2.5 percent higher. The Treasury believes that the fall in Chinese reserves reflects an effort to stem further CNH declines.

The Treasury made a point to highlight the IMF concerns over China. The IMF currently forecasts that China’s full-year account surplus will be 3 percent of GDP. This is primarily driven by expected declines in import values both through the slowing Chinese economy and a fall in commodity prices. The IMF’s solution for China is to shift its domestic economy towards greater reliance on household consumption. The report would also suggest China should disclose foreign exchange market intervention regularly.

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