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China’s Capital Flight Syndrome
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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.