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Capital account deficit hints at outflows, but risks restrained
By Fitch Ratings |
August 7, 2012, Tuesday
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Print Edition
Print Edition
THE first quarterly deficit in China?s capital and financial account since 1998 does not detract from the support China?s ratings receive from strong external finances in the medium term. But it points to a possible shift in the balance of rating factors in the longer term.
Data released last week by the State Administration of Foreign Exchange imply net capital outflows of US$71.5 billion in the second quarter. This is likely to be related to Chinese firms investing overseas, and some diversification by Chinese residents out of the yuan. Until a full breakdown of the data is available, it is not possible to assess the contributing factors. The second-quarter number is in contrast to the US$56.1 billion capital and financial account surplus in the first quarter.
The second-quarter reading has no immediate implications for China?s sovereign credit rating, which is supported by exceptionally large foreign reserves of around US$3.2 trillion. If capital outflows did sharply accelerate in the near term, this could feed through to the ratings if it caused significant economic or financial instability.
However, we do not think capital flight from China is a short-term risk. China still has extensive capital controls, which we do not expect to be lifted any time soon. More fundamental factors, such as the current account surplus or the fall in inflation that has turned real interest rates positive, also limit the likelihood of a sudden rush for the exit.
Broadly stable
In the medium term, if China?s balance of payments remains broadly in equilibrium, this would imply that its foreign exchange reserves position remains broadly stable, as it has since mid-2011.
Assuming economic growth continues, forex reserves will gradually fall relative to the size of the economy (or imports). This would gradually reduce the importance of the forex reserves position as a rating support. We do expect China?s overall balance of payments surpluses to be lower in future than the annual average of 11 percent of GDP over 2004-2008, partly because the trade surplus is likely to remain lower.
Fitch affirmed China?s ratings and Outlooks in April. The Negative Outlook on the òAA-ó Long-Term Local-Currency Issuer Default Ratings reflects our concern that the credit surge of 2009-2011 created contingent liabilities that, if they materialize, could weaken the sovereign balance sheet. The Outlook on the òA+ó Long-Term Foreign Currency IDR is Stable.
The article originally appeared as a post on the Fitch Wire credit market commentary page. It can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Data released last week by the State Administration of Foreign Exchange imply net capital outflows of US$71.5 billion in the second quarter. This is likely to be related to Chinese firms investing overseas, and some diversification by Chinese residents out of the yuan. Until a full breakdown of the data is available, it is not possible to assess the contributing factors. The second-quarter number is in contrast to the US$56.1 billion capital and financial account surplus in the first quarter.
The second-quarter reading has no immediate implications for China?s sovereign credit rating, which is supported by exceptionally large foreign reserves of around US$3.2 trillion. If capital outflows did sharply accelerate in the near term, this could feed through to the ratings if it caused significant economic or financial instability.
However, we do not think capital flight from China is a short-term risk. China still has extensive capital controls, which we do not expect to be lifted any time soon. More fundamental factors, such as the current account surplus or the fall in inflation that has turned real interest rates positive, also limit the likelihood of a sudden rush for the exit.
Broadly stable
In the medium term, if China?s balance of payments remains broadly in equilibrium, this would imply that its foreign exchange reserves position remains broadly stable, as it has since mid-2011.
Assuming economic growth continues, forex reserves will gradually fall relative to the size of the economy (or imports). This would gradually reduce the importance of the forex reserves position as a rating support. We do expect China?s overall balance of payments surpluses to be lower in future than the annual average of 11 percent of GDP over 2004-2008, partly because the trade surplus is likely to remain lower.
Fitch affirmed China?s ratings and Outlooks in April. The Negative Outlook on the òAA-ó Long-Term Local-Currency Issuer Default Ratings reflects our concern that the credit surge of 2009-2011 created contingent liabilities that, if they materialize, could weaken the sovereign balance sheet. The Outlook on the òA+ó Long-Term Foreign Currency IDR is Stable.
The article originally appeared as a post on the Fitch Wire credit market commentary page. It can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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