Q1 capital flows into China remain steady on stable yuan despite pandemic

Foreign capital flows into China remained steady during the first three months of the year on the back of a relatively stable yuan exchange rate and the basic equilibrium in the foreign exchange market, the State Administration of Foreign Exchange, the country's foreign exchange regulator, said on Friday.

Contrary to expectations, the novel coronavirus outbreak did not hamper capital flows into the Chinese capital market. During the January-to-March period, foreign investors increased their holdings of onshore bonds by 48 percent from a year earlier, an increase of $16.7 billion, while the market sentiment remained largely optimistic, said Wang Chunying, a spokesperson for the SAFE.

The steadily improving yuan exchange rate formation mechanism and stronger exchange rate elasticity played a significant role in attracting foreign investment to the country. The foreign exchange market is expected to remain stable this year, despite the external headwinds, the SAFE official said.

During the first quarter, banks settled and sold foreign exchange to the tune of $491.5 billion and $452.5 billion respectively, yielding a surplus of $39.1 billion, compared with a deficit of $56 billion in 2019, according to SAFE data.

In March, the surplus in banks' foreign exchange settlements stood at $18.6 billion, up from $14.2 billion in February, official data showed.

China's current account has been influenced by the novel coronavirus pandemic, largely due to weaker external demand and dwindling trade surplus in goods.

"During the first quarter, the current account is likely to remain stable within a reasonable range, although it may show a deficit. The COVID-19 pandemic will not alter the basic trend in the medium to long term," said Wang.

Although the global capital market has showed some shortage of dollar liquidity amid the COVID-19 outbreak, China has no plan to decrease the foreign debt leverage, or the proportion of money borrowed from overseas to the total domestic GDP, the spokesperson said.

Earlier, there were concerns that China might reduce its foreign debt holdings, mainly in terms of US Treasuries, to ease liquidity stress in the financial market.

Instead of selling US Treasuries, China has increased its holdings of the instruments by $13.7 billion in February, to $1.09 trillion, the highest in four months, according to data released by the US Department of Treasury on Wednesday.

By the end of last year, China's outstanding external debt increased to $2.06 trillion denominated in both domestic and foreign currencies, a record, while the outstanding short-term external debt was $1.21 trillion, accounting for 59 percent of the total amount, the SAFE said.

Central banks around the world have announced plans to expand liquidity, via loans and asset purchases, by at least $6 trillion and have indicated a readiness to do more if conditions warrant, the International Monetary Fund said in its global financial stability report released on Wednesday.

But persistent tightening in financing conditions will increase debt burden, weaken debt affordability and intensify external vulnerability risks for some sovereigns, said Christian Fang, an analyst for the Sovereign Risk Group at Moody's Investors Service, a global credit ratings agency.

"Policymakers have to strengthen the capacity to mitigate capital flight and prevent a sharp increase in foreign currency credit risks," she said.