China’s Capital Flight Syndrome

China, now one of the world’s two largest nations measured by gross domestic product (GDP), is displa­ying a strange malady. A sudden and large outflow of capital from the country is resulting in a sharp fall in its reserves. Going by International Monetary Fund (IMF) statistics, between the quarter ending June 2014 and the one ending June 2016, China’s foreign exchange reserves fell by $752 billion, from $4.1 trillion to $3.3 trillion. According to recent reports, reserves had fallen further to $3.1 trillion by the end of October 2016.

This collapse in reserves due to an outflow of capital is surprising in a country that for decades was considered the favoured destination for global capital flows, especially foreign direct investment (FDI). The outflow has been large eno­ugh to exert downward pressure on the currency, resulting in a depreciation of the Chinese renminbi (RMB) from RMB 6.11 to RMB 6.95 to the dollar (or of close to 14%) between August 2015 and ­January 2017.