On Monday, China’s central bank reported $3.4 trillion in foreign exchange reserves, the lowest level since early 2013. November was one of the biggest drops ever.
Many investors are trying to get at least some of their money out of the country. Many Chinese see better opportunities abroad, whether it’s real estate in New York or London, pricey art, or stocks and bonds in other countries.
Exact data is hard to come by from China, but Capital Economics forecasts that November set a record for people moving money out of China — so-called capital outflows.
“Today’s data suggest that capital outflows picked up sharply last month,” says Julian Evans-Pritchard, chief China economist for research firm Capital Economics.
All the evidence suggests that money has been flowing out of the country at a rapid pace since August when China stunned the world with a surprise devaluation of its currency, the yuan. The Chinese government simply declared that all of a sudden, the yuan was worth less.
That caused a major selloff in the Chinese stock market and worries that China’s economy is slowing down even more than the government is letting on.
When money leaves China, it means people are trading their yuan for dollars, euros and other currency. That makes the yuan fall even further in value.
China’s central bank appears to be trying to counterbalance that by using its foreign exchange reserves to buy back yuan. It’s a strategy many countries use, but it makes the “rainy day” reserve fund lower.
The other explanation for the big fall in China’s reserves in November is that the total is reported in U.S. dollars. The dollar gained in value against most other currencies last month, which means any euros or yen China held would look less valuable.
“It seems reasonable to assume that nearly half of the decline in China’s reserves may be traced to the vagaries of the foreign exchange market,” says Marc Chandler, head of currency strategy at Brown Brothers Harriman.
China views capital outflows as a problem. Over $500 billion has left China so far this year, according to U.S. Treasury data through August.
China limits the amount of money an individual can move out of the country to $50,000 per year. But this fall, Beijing even clamped down on the amount of cash its citizens can withdraw from ATMs overseas, another attempt to stop money from leaving the country.
Federal Reserve policy makers said the economy is still expanding at a “moderate” pace and they will consider tightening policy at their next meeting in December without making a commitment to act this year.
Even with a slower pace of recent job gains, “labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington.
The Fed also removed a line from September’s statement saying that global economic and financial developments “may restrain economic activity somewhat,” saying Wednesday only that the central bank is monitoring the international situation.
Chair Janet Yellen and her colleagues have been watching for more labor-market improvement and signs that inflation is rising toward their goal, despite headwinds from overseas, as they debate the first rate increase since 2006. At last month’s meeting, 13 of 17 officials still expected a hike this year provided the economy grew as forecast.
The assessment of the labor market, which said the pace of job gains “slowed and the unemployment rate held steady,” compared with last month’s language citing “solid job gains and declining unemployment.” The U.S. added 142,000 jobs in September, less than the 200,000 economists in a Bloomberg survey had forecast and well below the 205,000 average for the first eight months of 2015.
The FOMC vote was 9-1, as Richmond Fed President Jeffrey Lacker dissented for a second straight meeting, again calling for a quarter percentage-point rate increase.
Household spending and business fixed investment have been “increasing at solid rates in recent months,” the Fed said, compared with September’s language that those indicators have “been increasing moderately.”
The Fed reiterated that it expects inflation to rise gradually toward its 2 percent goal in the medium term.
Officials have held the benchmark overnight federal funds rate target in a zero-to-0.25 percent range since December 2008.
Investors before Wednesday’s statement saw a 4 percent chance that the Fed would move this month, based on pricing in fed funds futures that assumes a 0.375 effective rate after liftoff. They saw a roughly 35 percent chance of a move in December, as of 11:20 a.m. in Washington.
Subdued inflation has been a hurdle for the central bank as it moves closer to a rate increase. Even as the jobless level has fallen to 5.1 percent, close to policy makers’ 4.9 percent estimate of full employment, inflation has remained well below the committee’s 2 percent goal. The Fed’s preferred gauge of prices rose by just 0.3 percent in the 12 months through August.
In contrast, continued labor-market improvement has been a bright spot for the Fed as it looks to fulfill its dual mandate of maximum employment and stable prices. That makes the September slowdown in job growth a potential source of concern. Even so, several officials have indicated that a slower pace of job gains is acceptable and even desirable as labor-market slack ebbs.
“Looking to the future, we’re going to need at most 100,000 new jobs each month,” San Francisco Fed President John Williams said on Sept. 28 in Los Angeles. “In the mindset of the recovery, that sounds like nothing; but in the context of a healthy economy, it’s what’s needed for stable growth.”
Several important readings on the economy will be released later this week, including the initial estimate of third-quarter growth on Thursday. Economists surveyed by Bloomberg News estimated expansion slowed to a 1.5 percent annualized pace, from 3.9 percent in the previous three months.
The global outlook has proved another stumbling point for policy makers as they assess if the U.S. economy is strong enough to handle a rate rise.
A slowdown in China has helped to push down commodity prices, which is contributing to low inflation, while still-subdued economic performance in trading partners including Japan and the euro area have driven up the value of the dollar and cut into U.S. exports. The greenback had risen 9.2 percent against the euro and 0.5 percent against the Japanese yen since the start of the year, as of Wednesday at 9:43 a.m. in Washington.
The People’s Bank of China lowered benchmark interest rates last week, its sixth cut in a year, and European Central Bank President Mario Draghi said on Oct. 22 that he will investigate all options for more stimulus in December. That could include extending quantitative easing beyond its current end-date of September 2016, boosting monthly asset purchases from 60 billion euros and cutting the deposit rate. Those moves could brighten the international outlook if they succeed in propping up growth.
Global risk flows both ways: The International Monetary Fund on Oct. 7 told officials to protect their financial systems from possible instability as the Fed prepares to raise interest rates, saying shocks or policy missteps risk derailing the global economy and triggering equity market sell-offs. The fund described the preconditions for a Fed rate rise as “nearly in place.”
China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy.
The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China unified official and market exchange rates in January 1994. The People’s Bank of China called the change a one-time adjustment and said it will strengthen the market’s ability to determine the daily fixing.
Chinese authorities had been propping up the yuan to deter capital outflows, protect foreign-currency borrowers and make a case for official reserve status at the International Monetary Fund. Tuesday’s announcement suggests policy makers are now placing a greater emphasis on efforts to combat the deepest economic slowdown since 1990 and reduce the government’s grip on the financial system.
“It looks like this is the end of the fixing as we know it,” said Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd. “The one-off devaluation of the fix and allowing more market-based determination takes us into a new currency regime.”
The yuan dropped 1.8 percent to 6.32 per dollar as of 1:34 p.m. in Shanghai. It slid 2.3 percent in Hong Kong’s offshore trading. The onshore spot rate was 1.4 percent weaker than the reference rate of 6.2298, within the 2 percent limit allowed by the central bank.
The devaluation jolted global markets, with the currencies of South Korea, Australia and Singapore falling more than 1 percent amid bets other countries may seek weaker exchange rates to keep exports competitive. Shares of Chinese airlines sank on concern their dollar debt costs will rise, while commodities retreated amid speculation yuan weakness will erode the buying power of Chinese consumers. U.S. Treasuries gained on growing demand for dollar assets.
China’s intervention in the currency market had contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters. It made the yuan the best performer in emerging markets, fueling an 8.3 percent slide in exports last month.
The yuan’s real effective exchange rate — a measure that’s adjusted for inflation and trade with other nations — climbed 14 percent over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.
Effective immediately, market-makers who submit prices for the PBOC’s reference rate will have to consider the previous day’s closing spot rate, foreign-exchange demand and supply, as well as changes in major currency rates, the central bank said. Previous guidelines had no mention of these criteria.
“The new fixing will be quoted based on the previous day’s closing, which is a real market level,” said Becky Liu, a Hong Kong-based senior strategist at Standard Chartered Plc. “The band will become the real band. This is a big step, and bolder than we expected.”
China has to balance the need to boost exports with the risk of capital outflows, Tom Orlik, chief Asia economist at Bloomberg Intelligence, wrote in a research note. He estimates that a 1 percent depreciation in the real effective exchange rate boosts export growth by 1 percentage point with a lag of three months. At the same time, a 1 percent drop against the dollar triggers about $40 billion in outflows.
“The risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system,” Orlik said. The calculation from China’s leaders is that with their $3.69 trillion of currency reserves “they can manage any risks,” he said.
The PBOC said Tuesday that a strong yuan puts pressure on exports and cited a high effective exchange rate as a factor behind the devaluation. July’s export slump was deeper than economists predicted, while the nation’s index of producer prices declined 5.4 percent.
“Today’s sudden policy move is a reaction to a significant weakening of China’s export numbers in July and rising deflation risk,” said Liu Li-Gang, the chief Greater China economist at ANZ in Hong Kong.
While the devaluation will help support growth, Liu is predicting that the PBOC will lower lenders’ reserve requirements in August and cut benchmark interest rates this quarter for the fifth time in a year.
IMF requirements that reserve currencies must be freely usable may have also played a role in the PBOC’s move, according to Commerzbank AG. The fund has said in recent months that the yuan needs to be more flexible.
“The yuan exchange rate will be more market-oriented going forward,” Zhou Hao, an economist at Commerzbank in Singapore, wrote in a report. “Volatility of both the onshore and offshore rates will pick up significantly.”
The yuan’s one-month implied volatility, a measure of swings used to price options, surged 3.9 percentage points, the most since 2004, to 5.075 percent. The gauge had fallen to a one-year low of 0.993 percent on July 24.
China’s move has raised the risk of a “currency war” as export rivals seek a weaker exchange rate to stay competitive, according to Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia.
“It’s hard to believe this will be a one-off adjustment,” Roach said. “In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start sagging Chinese exports. That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.”
China’s annual consumer inflation recovered in February, exceeding expectations, but producer prices continued to slide, underscoring deepening weakness in the economy and intensifying pressure on policymakers to find new ways to support growth.
The producer price index (PPI) declined 4.8 percent in February, the National Bureau of Statistics said on Tuesday, extending factory deflation to nearly three years.
China’s statistics bureau attributed the rise in CPI to price rises in vegetables and fruit, while the decline in PPI – which analysts had expected to come in at minus 4.3 percent – was blamed on sliding prices for global commodities, in particular energy, which have undermined profitability at China’s industrial heavyweights.
The risk of deflation is rising for the world’s second-largest economy, as drag from a property market downturn and widespread factory overcapacity is compounded by an uncertain global outlook and falling commodity prices.
Analysts polled by Reuters had expected annual consumer inflation to be 0.9 percent in February, compared with a five-year low of 0.8 percent in January.
Chinese leaders announced last week an economic growth target of around 7 percent for this year, below the 7.5 percent goal that was narrowly missed in 2014.
The consumer price index target was put at around 3 percent for this year. Annual consumer inflation was 2 percent in 2014, well below the government’s target of 3.5 percent.
The People’s Bank of China (PBOC) has cut interest rates twice since November, on top of a reduction in bank reserve requirement ratios (RRR) in February, as regulators show signs of growing concern over lackluster data since the fourth quarter and growing deflationary pressures.
A newspaper owned by the central bank warned last month that China was dangerously close to slipping into deflation, highlighting increasing nervousness in policymaking circles as a sputtering economy struggles to pick up speed, despite a series of stimulus steps.
There could be some distortion caused by the timing of the Lunar New Year as it fell on January 31 in 2014 but fell on Feb 19 this year.