China: The surge in capital flows may be just beginning

China’s capital in- and outflows have risen strongly since early 2020, following the easing of policy restrictions both ways, according to Oxford Economics. However, China’s integration into the global financial system has only just begun, and the potential for capital flows to expand further is large, especially for portfolio flows.

Rising capital inflows have largely been in the form of foreign direct investment (FDI) and portfolio flows. Foreign interest in Chinese assets has recently risen markedly, with foreign investors’ equity and bond holdings boosted by the country’s robust economic growth and relatively high interest rates.

The strong inflows, in turn, have led policymakers to ease their stance regarding capital outflows. The current approach seems to welcome foreign capital while also encouraging — up to a limit — capital outflows to dampen the impact on a relatively flexible exchange rate. In this context, capital outflows surged in 2020.