China flags capital flight risks from global QE

BEIJING Wed Apr 3, 2013 7:13am EDT

A worker and China's national flag are seen at a construction site for a new business building in Beijing, April 2, 2013. REUTERS/Kim Kyung-Hoon

A worker and China's national flag are seen at a construction site for a new business building in Beijing, April 2, 2013.

Credit: Reuters/Kim Kyung-Hoon

BEIJING (Reuters) - China faces the danger of capital flight this year, its currency regulator warned on Wednesday, after data confirmed the country's capital and financial account in 2012 suffered its first deficit since the Asian financial crisis.

But the State Administration of Foreign Exchange (SAFE) said risks were mitigated by global interest rate differentials that attracted foreign funds to China while the United States and other countries pursued super-loose monetary policies.

China's capital and financial account deficit hit $16.8 billion last year, although it was revised down sharply from a preliminary figure of $117.3 billion.

SAFE said China could again see capital outflows this year if its economy stumbles and Europe's debt crisis worsens, factors that analysts said were crucial in driving foot-loose investors out of the world's No. 2 economy in 2012.

Looking ahead, SAFE warned that Asia may also suffer twin blows of trade friction and policy tension if regional nations followed Japan in running beggar-thy-neighbor currency policies and depreciate their currencies for trade gains.

"We cannot exclude the possibility of sudden capital outflows," SAFE said in its 2012 balance of payments report as it highlighted risks of faltering global economic growth, macro policy changes, deepening geopolitical tensions and sovereign debt problems.

The regulator reserved its toughest words for Japan, taking aim at its loose monetary policy that has allowed the yen to fall 8 percent this year.

Ties between China and Japan have always been testy but they took a turn for the worse last year as Asia's two biggest economies squabbled over ownership of a group of islets in East China Sea.

"If Asian economies copied Japan, trade friction and policy games may increase and regional cooperation would be disrupted," SAFE said.

"If the yen depreciates more than expected and inflation management loses control, it could trigger capital flight and arouse market distrust of Japanese government bonds."

The Bank of Japan is set to emerge from its latest policy meeting on Thursday when investors expect the central bank to announce hefty bond purchases and a radical shift in policymaking to drive Japan out of its nagging deflation.

But SAFE said policies that kept rates low elsewhere made China a magnet for foreign capital.

"If major developed economies continue to implement quantitative monetary easing policies, the positive interest rate differentials between here and abroad will spur arbitrage capital into our country," the SAFE statement said.

STABLE INFLATION, FOR NOW

China revised down its current account surplus in the fourth quarter of 2012 to $45.1 billion from an initial reading of $65.8 billion, SAFE said.

For the full year of 2012, China's current account surplus totaled $193.1 billion, down from the previously reported $213.8 billion, SAFE said.

That gave China a current account surplus worth 2.3 percent of its 2012 gross domestic product, well below the 4 percent limit proposed by former U.S. Treasury Secretary Timothy Gerthner as a way of defusing tension over currencies before it sparks a trade war.

SAFE also said China saw a capital and financial account surplus of $20.0 billion in the fourth quarter, revised from a preliminary deficit of $31.8 billion.

China battled its worst downturn in 13 years last year when annual growth slumped to 7.8 percent.

In a separate statement, China's central bank said the country's economic growth is stabilizing and that inflation is "basically stable". The bank made the remarks after holding its first-quarter monetary policy committee meeting.

But the central bank noted that future price trends bear a level of uncertainty, and that it would keep monetary conditions "stable". ($1 = 6.1986 Chinese yuan)

(Reporting by Aileen Wang, Langi Chiang and Koh Gui Qing; Editing by Nick Edwards and Sanjeev Miglani)

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