China Hit by Big Capital Outflows, but Data Indicate Continuing Purchases of U.S. Treasurys

ANDREW BATSON BEIJING -- China's central bank published data suggesting there were large outflows of capital from the country during the fourth quarter, a change that has put authorities in the unusual position of having to rebuild market confidence in the strength of one of the sturdiest Asian currencies. The capital outflows were so large in October that China's reserves of foreign exchange declined by $25.9 billion in October, the People's Bank of China said, interrupting a steady rise in recent years. The outflows appeared to continue into November and December, as foreign-exchange reserves rose only by $5.03 billion in November and $61.31 billion in December, ending the year at $1.946 trillion. The total rise of $40.45 billion in reserves in the fourth quarter means China is continuing to buy U.S. Treasurys and other government debt. After the financial crisis intensified in September, many emerging-market economies suffered from a toxic combination of capital outflows and declining currencies. China has largely been an exception, thanks to continued large trade surpluses that have brought money into the country. Moves in China's currency reserves, by far the largest in the world, are watched closely -- not least because Beijing lends much of that cash back to the U.S. government. A long drop in reserves, while not likely anytime soon, could disrupt those purchases. Chinese officials had been flagging the possibility of a temporary decline in the reserves, but final figures weren't released until Tuesday. The risk that capital outflows could intensify is complicating management of the economy. "At the moment they can conduct domestic policy in any way they think is appropriate. If capital outflows become significant enough, the degrees of freedom over domestic policy shrink materially," said Richard Yetsenga, a foreign-exchange strategist for HSBC in Hong Kong. The threat of outflows, analysts say, appears to have kept China from significantly depreciating its currency, despite pressure from exporters for a cheaper yuan. Chinese exporters are suffering from a decline in demand in the U.S. and Europe, and a less valuable yuan would help make their goods more attractive in dollars or euros. "If they engineer a depreciation it may change the expectations not only among foreign investors, but also among China's own residents," thereby encouraging ordinary people to send money abroad en masse, said Wang Qing, an economist for Morgan Stanley. Investors have been reversing bets on gains in the currency. The exact reasons for the fluctuations in China's reserves are often not clear, because the central bank discloses little information. Central-bank officials in recent days have said any decline in the dollar value of reserves would be due mainly to swings in the currency market, particularly in the value of the euro. But many private-sector analysts believe the recent changes are too large to be explained by currency moves alone.