Why Chinese capital outflows need to be watched in India

Has some of that money been recycled into India?
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First Published: Tue, Feb 05 2013. 11 21 AM IST
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Tue, Feb 05 2013. 03 12 PM IST
The capital outflow from China in 2012 is perhaps the most important global economic story to be ignored in India.
The Chinese foreign exchange regulator said on Friday that the country had a capital account deficit of $117.3 billion in 2012. It essentially means that more capital left China than came in. This is the first such deficit since 1998, the year after the Asian financial crisis.
An outflow of this size—about 1.3% of gross domestic product—has not sent the Chinese currency tumbling because the country runs a large current account surplus. Its latest annual current account surplus is $208 billion. In other words, China continues to earn enough from its global trade to comfortably cover the capital outflow.
In that sense, India is a mirror image of China. It has a current account deficit of $80 billion that it funds with inflows of foreign capital.
There is one important reason why India should keep a closer watch on the capital outflow from China. That money needs a parking slot. India is one possibility. It is quite likely that the increase in flows into India could be linked to the outflows from China (of course, other factors such as the monetary relaxation in the West after July as well as the new reforms push in India have also helped). Global investors put a net $24.55 billion into Indian equities in 2012; the inflows in January have continued to be strong, at $4.1 billion.
Discussions with money managers in Mumbai suggest that India could have benefited from the movement of money out of China in the past 12 months. So, hold on to the Chinese possibility for a moment. Confidence in the Chinese economy has improved over the past couple of months. The CSI300 index of the largest Shanghai and Shenzhen A-shares is up over 30% since early December, according to a Reuters report.
A look at the quarterly data also suggests that the outflows are shrinking with each passing quarter. They are down from $52 billion in the third quarter of 2012 to $14 billion in the fourth quarter. It is not clear what is driving these outflows—are they a cyclical response to problems in the Chinese economy or are wealthy Chinese sending money out to diversify their portfolios?
Structural outflows because of portfolio diversification could mean that some of that money comes into India on a sustainable basis. Cyclical outflows mean that the money could be mobile, pulling out of India to reinvest in China once confidence there improves.
There are many unknowns, but Indian investors and policymakers still have good reason to keep a closer watch on the Chinese capital account.
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First Published: Tue, Feb 05 2013. 11 21 AM IST
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