Originally posted on Overheard:
More signs of bearish sentiment on China, this time from cross border capital flows.
Data released Monday showed China’s banks were net sellers of foreign currency in October (in Chinese). That’s unusual because China’s trade surplus, combined with inflows of direct investment, mean the mainland’s banks are almost always net buyers of foreign currency.
Indeed, the numbers normally suggest that in addition to the trade surplus, banks are buying up speculative capital flowing into the economy. Tuesday’s numbers suggest that now speculative capital might be exiting China. That makes sense givendiminished expectations of yuan appreciation, falling property prices and a deepening crisis in Europe pushing investors away from risky positions.
A comparison with past occasions when hot money has flowed out of China provides little reassurance. Netting out the trade surplus from banks’ FX purchases gives a rough approximation of the scale and direction of capital flows. The last time it turned negative was May 2010, when fears of a double dip downturn were on the rise. The time before: the eve of the financial crisis in August 2008.
– Tom Orlik
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