Yuan Watch : Capital flight

By ANDREW BATSON
January 14, 2009
Wall Street Journal

BEIJING -- China's central bank published data suggesting there were large outflows of capital from the country during the fourth quarter, a change that has put authorities in the unusual position of having to rebuild market confidence in the strength of one of the sturdiest Asian currencies.

The capital outflows were so large in October that China's reserves of foreign exchange declined by $25.9 billion in October, the People's Bank of China said, interrupting a steady rise in recent years. The outflows appeared to continue into November and December, as foreign-exchange reserves rose only by $5.03 billion in November and $61.31 billion in December, ending the year at $1.946 trillion.

The total rise of $40.45 billion in reserves in the fourth quarter means China is continuing to buy U.S. Treasurys and other government debt.

"If they engineer a depreciation it may change the expectations not only among foreign investors, but also among China's own residents," thereby encouraging ordinary people to send money abroad en masse, said Wang Qing, an economist for Morgan Stanley.

The exact reasons for the fluctuations in China's reserves are often not clear, because the central bank discloses little information. Central-bank officials in recent days have said any decline in the dollar value of reserves would be due mainly to swings in the currency market, particularly in the value of the euro. But many private-sector analysts believe the recent changes are too large to be explained by currency moves alone.