Capital Outflows: Balancing Short and Long-Term Flows

Pay attention to the simultaneous outflow of long-term and short-term capital

In the second quarter of 2024, China's international balance of payments continued the "one surplus and one deficit" situation. The current account surplus was $54.9 billion, and the deficit of the financial account excluding reserves was $102.7 billion, including errors and omissions, and the reserve assets decreased by $47.9 billion. It is worth noting that the deficit of the financial account excluding reserves, including errors and omissions, reached the fourth peak since 2017 in this quarter, only behind the second and third quarters of 2022 and the third quarter of 2023.

In the second quarter of 2024, China's trade surplus in goods and trade deficit in services were $167.1 billion and $61.7 billion, respectively. The trade surplus in goods of $167.1 billion was the fifth-highest in history, only behind the third quarter of 2022 ($196 billion), the fourth quarter of 2020 ($187.1 billion), the fourth quarter of 2021 ($182.8 billion), and the second quarter of 2022 ($171 billion). It is worth mentioning that the trade surplus in goods according to customs statistics in the second quarter of 2024 reached $254 billion, while the trade surplus in goods according to customs statistics in the third quarter of 2022, the fourth quarter of 2020, the fourth quarter of 2021, and the second quarter of 2022 were $265.4 billion, $212 billion, $250.7 billion, and $227.8 billion, respectively.

It is also worth noting that the deficit in the primary income item in the second quarter of 2024 reached $53.2 billion, which is the third-highest deficit in history, only behind the second quarter of 2022 (-$74.3 billion) and the second quarter of 2023 (-$54.9 billion). The main reason is the significant negative net income from China's overseas investments.

In the second quarter of 2024, China's direct investment deficit reached a historical peak of $85.6 billion. On the one hand, China's outward direct investment in the same period was $70.8 billion, an increase of 87% month-on-month and 82% year-on-year. In the current international economic and trade environment, the significant increase in China's outward direct investment scale in the second quarter of this year is somewhat puzzling. Among these $70.8 billion, outward equity investment increased by $40 billion, and outward debt to related enterprises increased by $30.8 billion. On the other hand, foreign direct investment decreased by $14.8 billion in the same period, which is the second quarterly decline in the scale of foreign direct investment since the third quarter of 2023, and the decline is higher than that in the third quarter of 2023 ($12.1 billion). Among these $14.8 billion of foreign direct investment decline, the equity investment of foreign direct investment actually increased by $7.3 billion, but the debt to related enterprises of foreign direct investment decreased by $22 billion. Considering that foreign direct investment only increased by $10.2 billion in the first quarter of 2024, the overall foreign direct investment in the first half of 2024 was negative, which undoubtedly deserves our vigilance.

So far, the State Administration of Foreign Exchange has not yet released the specific data for securities investment, other investments, and errors and omissions in the second quarter of 2024. However, overall, the deficit of the financial account excluding reserves, excluding FDI, was $17.1 billion. This means that the short-term capital flow in the second quarter of 2024 generally showed a small outflow characteristic.

Regarding the current net outflow of short-term capital, we can also get confirmation from the high-frequency data of banks' settlement and sale of foreign exchange on behalf of customers. The balance of banks' settlement and sale of foreign exchange on behalf of customers in the first half of 2023, the second half of 2023, and the first half of 2024 were $8.2 billion, -$64.5 billion, and -$121.5 billion, respectively. It is particularly worth mentioning that the deficit of banks' settlement and sale of foreign exchange on behalf of customers in July 2024 further rose to $45.7 billion, which is a new monthly high since February 2016. In other words, as shown in Figure 4, from the perspective of banks' settlement and sale of foreign exchange on behalf of customers, the current capital outflow pressure is the most significant since 2017.In summary, during the second quarter of 2024, China's capital flows exhibited a characteristic of net outflows for both long-term and short-term capital, which deserves our high attention. Although the recent turmoil in the global financial markets has alleviated the depreciation pressure of the Chinese yuan against the US dollar, if the situation of capital outflows does not improve, the exchange rate of the yuan will still be under pressure.

To improve the situation of capital outflows, on the one hand, it is necessary to boost domestic demand and eliminate the negative output gap as soon as possible through the implementation of expansionary macroeconomic policies. On the other hand, it is essential to enhance the confidence and expectations of domestic and foreign micro-entities by intensifying reform and opening up. The author believes that with the deployment and implementation of the decisions made at the Third Plenary Session, China's cross-border capital flows will significantly improve, and the exchange rate of the yuan against the US dollar is expected to return to a stable and rising situation.