Capital Flows Out at Faster Pace

China experienced continuous capital outflow in the fourth quarter of 2008, with the scale expanding in a "larger-than-expected" pace in December, said a report released by the Chinese Academy of Social Sciences (CASS).

"The capital outflow was much severe in December," said Zhang Ming, a CASS economist and the report's author.

More than $25 billion fled China in December, up from $17.5 billion two months ago, said Zhang.

A report released by Morgan Stanley Asia estimated that the capital outflow could be as large as $73.2 billion in the fourth quarter last year.

"This is consistent with the much slower pace of renminbi appreciation over the past few months," said Wang Qing, chief economist with Morgan Stanley Asia.

The yuan has appreciated more than 20 percent against the US dollar since China scrapped its peg to the greenback. Analysts say that has attracted an inflow of speculative capital over the past three years, as investors try to cash in on the currency's revaluation.

However, the yuan's rise against the dollar has tapered off over the past month, triggering speculation that the central bank may reverse its rapid rise.

The nation's forex reserve increased $45 billion in the fourth quarter, totaling $1.95 trillion by the end of 2008. But the increase fell short of many analysts' forecasts, due to the decline in trade surplus and foreign direct investment last December. Customs figures show the nation's trade surplus fell to $38.98 billion in December, smaller than a record $40 billion a month ago, with exports slumped 2.8 percent and imports 21.3 percent.

China's foreign direct investment declined 5.7 percent to $5.98 billion in the last month of 2008, dragging the annual growth rate to 23.58 percent, down from the 26.3 percent in the first 11 months of last year, the Commerce Ministry announced yesterday.

"The pickup in the foreign exchange reserve growth in December was mainly due to the fluctuation in the exchange rate between the US dollar and euro, said Zhang.

The monthly forex reserve for December rose by $61.3 billion, reversing from the $25.9 billion drop in October, which is largely due to the euro's 12-percent gain against the greenback during the period, according to Zhang.

Looking toward 2009, Zhang said the capital exit is not likely to reverse in the first two quarters, but the nation may lure more capital in the second half of 2009, as overseas investors will face increasing pressure to make a profit.

"The move may boost the Chinese stock market and push up the price of real estate in China once again in late 2009," he said.