China Faces Major Capital Flight as Investors Pull Funds Amid Slumping Stocks

Amidst a significant decline in Chinese equity prices, investors are pulling money out of China's onshore stock exchanges at an accelerating rate, marking the most substantial capital outflow from the country in seven years, according to Goldman Sachs. The investment bank reported, "Foreign investors were net sellers of US$3.3 billion of A shares last week, bringing the leakage so far this month to US$5.1 billion or about half of the net outflows in the region."

"The CSI 300 Index tumbled 4.2 per cent last week, approaching the lowest level in 12 months," the report highlights. Notably, this trend is primarily impacting market leaders such as liquor distillers Kweichow Moutai and Wuliangye Yibin, food-seasoning producer Haitian Flavouring, gold miner Zijin Mining, advertising company Focus Media Info, and Ping An Insurance (Group).

Goldman Sachs economists have attributed this capital flight to various factors, including the divergence in interest rates between the United States and China. They noted that the United States is expected to maintain "higher for longer" interest rates, while China's central bank may need to ease monetary policy further. This dynamic has put significant pressure on capital outflows and the depreciation of the yuan.

"In spite of the elevated goods trade surplus, China only received a net inflow of US$15 billion in September versus US$26 billion in August, suggesting businesses have kept a larger portion of their export earnings outside the country amid the yuan depreciation," Goldman Sachs stated in its report.

Over the past six months, Chinese stocks have been struggling as Beijing has been cautious about stimulating its economy, following the initial enthusiasm around its zero-Covid strategy. The yuan's depreciation, now at a 16-year low, is also leading businesses to keep more of their export proceeds outside the country.

In response to concerns about capital leakage, Chinese authorities have taken steps to close certain loopholes. They have barred the nation's stock brokerages based in Hong Kong and other offshore locations from signing up customers based in mainland China.

According to Goldman Sachs, September witnessed a significant capital outflow of US$75 billion, marking the largest net outflow since 2016. This came on the heels of a US$42 billion flight in August, driven by deficits in both the capital and current accounts. These developments reflect the complexities and challenges facing China's economic landscape, which have global implications for investors and policymakers alike.

By fLEXI tEAM