Capital outflows not severe concern in China as US expected to slow rate hikes

WASHINGTON - Capital outflows from China will not pose a severe concern to the world's second-largest economy and are likely to slow down in the next few months as the US Federal Reserve is expected to slow the pace of future interest rate hikes, experts said.

Since the People's Bank of China (PBOC), the central bank, announced on Aug. 11 to revamp the foreign exchange mechanism to make the rate more market-based, the currency renminbi, or the yuan, has faced downward pressures and concerns about capital outflows from China have been on the rise.

China's foreign exchange reserves dropped by $99.5 billion to $3.23 trillion in January, after a record fall of $107.9 billion in December, signaling capital outflow pressures in recent months, according to the PBOC.

"Capital outflows originated in part from market expectations that the Fed would increase interest rates and the PBOC would cut rates, resulting in narrower interest rate spreads between the US and China," Zhou Hao, a professor at Tsinghua University's PBC School of Finance, told Xinhua in a recent interview.

The Fed raised its benchmark interest rates to a range of 0.25 percent to 0.5 percent on Dec 16, the first rate hike in nearly a decade, making the US dollar more attractive to yield-seeking investors and driving investment flows into the United States. At that time Fed policymakers estimated that there would be four more rate hikes in 2016, with the earliest to come in March.

But the global economic and financial turbulence since the start of this year has raised concerns about the strength of the US economy, throwing the Fed's rate hike plan into doubt.

William Dudley, president of Federal Reserve Bank of New York and a close ally of Fed Chair Janet Yellen, said Monday that the balance of risks to his US economic outlook may be "starting to tilt slightly to the downside," an assessment that could signal a pause for the central bank's rate hikes.

Only 9 percent of the business and academic economists predicted the Fed would raise interest rates in March, while roughly 60 percent of economists said the central bank would wait until June to hike interest rates, the latest survey conducted by the Wall Street Journal indicated.

Zhou, a former Fed senior economist, said the US central bank would be cautious to probably raise interest rates only twice this year because of "the moderate recovery of the US economy and uncertainties in the global financial markets."

As the impact of Fed tightening on the US dollar looks largely priced in, Zhou believed the expected slower pace of Fed rate hikes this year would limit further dollar appreciation, ease the yuan's depreciation pressure and slow capital outflows from China.

Zhou said the PBOC preferred to use open market operations and lending facilities rather than interest rate cuts to provide liquidity and support China's economy in recent months, which would also help stabilize market expectations of the yuan's value.

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