Talking Points:
- SAFE reported capital outflows of $164.4 billion in the fourth quarter versus $196.1 billion in third quarter of 2015
- The PBOC has fought capital outflows for some time, seemingly intensified after the new Yuan fixing rate policy
- China concerns have contributed to risk aversion, the dominant theme in the markets since the turn of the new year
Losing Money Trading the Australian and New Zealand Dollars? This might be why.
China’s State Administration of Foreign Exchange published a statement regarding capital flows. According to Reuters, SAFE reported that Chinese banks sold $164.4 billion in FX reserves in the end of 2015 versus $196.1 billion in the third quarter. This makes for a 61 percent (QoQ) contraction in capital flight.
The administration reported that cross-border capital flow risks are controllable and promised to guard against any abnormalities in these flows. The State Administration of Foreign Exchange also said that Chinese forex reserves remain ample and that ups and downs in FX purchases are becoming the new normal. SAFE added that there are now new measures to limit forex reserve buying with the policy for individual FX purchases remaining largely unchanged.
As can be seen on the first chart below created by Currency Strategist Ilya Spivak, the People’s Bank of China has been fighting Yuan depreciation since mid-2014 by spending FX reserves. The adjustment of the Yuan fixing rate policy back in August 2015 amplified capital flight. Further signs of slowdown in capital outflows from China may offer a sigh of relief to the current dominant theme in the markets.
Chinese concerns have contributed to risk aversion, and it has been the predominant theme in the markets since 2016 began. The sentiment-linked Australian and New Zealand Dollars have been some of the worst performers against the greenback three weeks into January. S&P 500 and Nikkei 225 futures have been following the commodity-linked currencies lower in the same risk-off environment. Simultaneously, the anti-risk Japanese Yen has been the best performing major versus the US Dollar thus far in January.
Chart created by Currency Strategist Ilya Spivak
