(Bloomberg) — As if the yuan wasn’t already under pressure from China’s weak economy, a rising dollar and the prospect of higher U.S. tariffs, the currency is facing an additional downside: a flood of money looking to invest abroad.
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China’s capital account, which tracks capital flows in and out of the country, saw record outflows last year as investors sought better returns abroad. As a result, payments by banks on behalf of their clients for capital and financial transactions exceeded payments for current accounts, which, according to official data, mainly refers to trade.
This is unprecedented. A widening of that imbalance is likely to fuel fears of severe capital outflows, undermining Beijing’s ability to manage the yuan and increasing the chances of regulatory strikes.
The fact that China’s capital and financial flows have increased greatly “suggests a bias towards depreciation or, if the currency is unchanged, a reduction in reserves,” said Philip McNicholas, Asia sovereign strategist at Robeco Singapore.
“The challenge for the People’s Bank of China is that weak growth makes it difficult to attract growth-sensitive portfolio inflows, and risks around the sustainability of overseas operations in China make multinational corporations reluctant to add to, or in some cases exit or sell, investments there,” he said.
The yuan has fallen about 2.8% over the past three months, trailing losses across all Asian currencies, while the dollar has rallied since Donald Trump’s Nov. 5 election victory. China’s currency fell this month to its weakest level since September 2023.
Traveling abroad
China’s local banks sent a net 1.33 trillion yuan ($182 billion) overseas on behalf of their investment clients last year, a record based on Bloomberg calculations. This total takes into account foreign investment in the country, as well as the purchase of foreign securities by local investors.
The national capital account has come under pressure due to the decline in foreign direct investment inflows into the country, the appetite of local companies to expand abroad and the exodus of funds from local stocks. The combination of these factors has led to higher demand for dollars, higher outflows and higher volatility of the yuan.
