Even when China was losing reserves, stories about “capital flight” were grossly exaggerated. When a country experiences true capital flight—as Cyprus and Greece have in recent years—it shows up as a decline in bank deposits, as households pull their money out of domestic banks and send it abroad. In China, household bank deposits today are a healthy RMB 21.5 trillion, up 16 percent from a year ago. The vast majority of reserve losses reflected Chinese companies paying down foreign-currency debts, making real-economy investments abroad, or simply shifting cash into dollar accounts inside Chinese banks.
The one truly important international impact of the weaker renminbi is that Chinese private companies have accelerated the pace of their investments abroad: outbound direct investment by Chinese firms in the first half of 2016 already exceeds the total for all of 2015. But even here the currency plays only a supporting role. The most important factor is that many Chinese companies are now mature enough to want to expand internationally—just as Japanese firms did starting in the 1970s. Second, China’s economy is slowing, so that investments in untapped markets abroad seem more attractive. And finally, companies have an incentive to move fast, because the longer they wait, the greater the risk that the renminbi will have fallen a bit more, making their investments more expensive. This is not capital flight, this is the Chinese economy growing up. And on balance, that’s a good thing for the world.More in ChinaFile.
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