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China Feels Emerging-Market Headwinds
By Richard Silk
The wind-down of an extraordinary period of monetary stimulus in the U.S. could cast a shadow over China's fragile growth, raising fears of renewed stress in financial markets and a hit to the budding recovery in exports. The flow of funds out of Asia—anticipating higher U.S. interest rates—has not yet hammered China as badly as some of its neighbors. That's largely because China imposes broad controls on capital, limiting foreign investments in stocks, bonds and property as well as the money Chinese investors can send overseas.But those controls are not watertight, and recent data suggests that capital is leaving the country. In July, China's banking system had a second straight month of foreign-exchange outflows, with net foreign currency sales totaling 24.5 billion yuan ($4 billion). That means banks were net sellers of dollars, an indication of money leaving the country.
The outflows in June and July represent a reversal from the first five months of the year. The expectation of higher rates in the U.S makes it less attractive to hold funds in foreign currencies, including the yuan, changing the dynamics of currency hedging for companies and investors. If China's exporters decide to keep their earnings in dollars rather than convert them into yuan, that reduces banks' foreign-exchange purchases.
China's currency, which trades within a narrow band set by the central bank, has yet to be shaken by these outflows. The country runs a trade surplus, which means it is not reliant on foreign funding to pay for its imports. That puts it in a stronger position than India or Indonesia, whose currencies have been pushed significantly lower in recent weeks.
"Other emerging-market currencies have been closely linked to capital inflows due to QE, and outflows due to the tapering of QE," said Qinwei Wang, an economist at Capital Economics. "But for China the dominant factor is still the continued trade surplus."
Still, outflows of capital worsen tight-liquidity conditions in China's domestic banking system, which is still dealing with the effects of a severe liquidity shortage in June. Short-term interest rates averaged 4.1% so far in August, up from an average of 3.4% in the first five months of the year. That means Chinese banks have to rein in their lending.
Fund outflows also depress equity and property prices, at a time when the stock market is already stuck in the doldrums and analysts are nervous that overbuilding in some of China's smaller cities may send property prices sharply lower. The benchmark Shanghai Composite index has fallen 10.3% since the U.S. Federal Reserve raised the idea of tapering its massive bond-buying program three months ago.
China also suffers if its more vulnerable neighbors in Asia hit a speed bump, as that hurts an increasingly important market. China exported $135 billion to Southeast Asia in the first seven months of the year, compared with $200 billion to the U.S. and $188 billion to the European Union.
"If the current upheaval in key emerging markets were to threaten that global recovery, we would need to revise down our growth outlook for China," said Louis Kuijs, an economist at RBS.
Filed under Macro Trends
About bambooinnovator
Kee Koon Boon ("KB") is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea's largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore's financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world's first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.