What’s Causing Those Capital Outflows From China: QuickTake Q&A

From the perspective of China’s leadership, money is moving in the wrong direction. Capital has been leaving the nation since 2014, as foreign investors cash out and local companies repay dollar debt amid a slump in the yuan. Policy makers, avid fans of stability, responded by tightening capital curbs and spending foreign reserves to stabilize the currency. But still, capital outflows continue and there’s no sign of it reversing anytime soon.

Many reasons. Investors are not optimistic about China’s economy, which is expanding at the slowest pace in more than a quarter century. Growth might be slower still because policy makers are seeking to reduce leverage in bonds, cool property prices and push ahead with a slew of reforms including cutting excessive capacity and making state-owned enterprises more efficient. Also, a gauge of the greenback’s strength rose almost 5 percent in the last two months. All of that keeps the yuan in a vicious circle: Foreign investors sell the yuan as the economy slows and the dollar rallies, and domestic households buy other currencies, adding to pressure on China’s exchange rate, leading to more outflows.