x Abu Dhabi, UAETuesday 23 January 2018

China posts biggest gap in its capital account

China last year had the biggest deficit in its financial and capital account since records began in 1982 as the domestic and global economies slowed, spurring outflows of funds.

The world's second-biggest economy has sprung a US$117 billion leak.

China last year had the biggest deficit in its financial and capital account since records began in 1982 as the domestic and global economies slowed, spurring outflows of funds.

The $117.3 billion (Dh430.45bn) annual gap was the first since 1998 when investors deserted China during the Asian financial crisis and reversed a $221.1bn surplus in 2011, according to data released on the Chiese state administration of foreign exchange (Safe) website.

The current-account excess rose to $213.8bn last year from $201.7bn the previous year.

The deficit may reflect reduced intervention by the central bank to control the exchange rate of the yuan, which strengthened 1 per cent against the dollar last year, the least in three years. China's foreign-exchange reserves, the world's largest, rose the least since 2003 last year, as the economy expanded at the weakest pace since 1999.

"This shows China's balance of payments is returning to a normal state," said Liu Li-Gang, the head of greater China economics at Australia & New Zealand Banking Group in Hong Kong.

"At the margin this will slow China's rapid reserve accumulation and reduce the pressures for the yuan to appreciate further."

The capital and financial account includes flows of funds for mergers and acquisitions, foreign direct investment, purchases and sales of equities and fixed-income securities and the central bank's reserve account used to buy and sell foreign currencies.

The foreign-exchange regulator, which is part of the central bank, said the deficit reflected outflows from weaker growth in China and worldwide as well as "more intensive international financial turbulence". Safe said the gap reflected positive developments in "allowing people to hold foreign exchange", or decentralizing holdings from the state to banks and the private sector.

Helen Qiao, the chief greater China economist at Morgan Stanley in Hong Kong, said the deficit "reflects a combination of growing enthusiasm for Chinese firms to invest overseas, weaker expectation for yuan appreciation and weaker growth at the lower part of a business cycle in China last year".

Ms Qiao said Safe's data release was incomplete and that a more detailed breakdown in March or April would provide a better indication of the cause of the gap.

Mark Williams, an economist at Capital Economics and a former China adviser to the UK treasury, said recent data showed increasing capital inflows, which "will be much stronger in the first half".

Safe released the data after the close of markets in China. The benchmark Shanghai Composite Index rose 1.4 per cent to finish up 5.6 per cent for the week, the best weekly performance since October 2011.

Reports on Friday showed China's manufacturing expanded last month, validating the nation's reluctance to add to policy stimulus amid increasing inflation concern.

The Purchasing Managers' Index was 50.4 last month compared with 50.6 in December, the national bureau of statistics and China federation of logistics and purchasing said as they more than tripled the number of companies surveyed. A separate gauge from HSBC and Markit Economics covering fewer businesses rose to a two-year high of 52.3 from 51.5. Readings above 50 indicate expansion.

Chinese officials have been hesitant to add stimulus beyond accelerated approvals for investment projects and two interest- rate cuts last year, with a measure of input prices in the government-backed gauge rising to a 17-month high. Friday's official report showed export orders contracted, underscoring concern about the strength of global demand.

"China - and most of the Asian countries except Japan - is switching to a more-neutral policy stance," said Joy Yang, the chief Greater China economist at Mirae Asset Securities in Hong Kong. In the second half, she said, "growth momentum is going to lose support from the policy side and we have to rely more on the private sector as well as the global recovery".