China's huge pool of foreign exchange has been steadily shrinking, but whether capital is gradually flowing out or fleeing the country is a matter of debate.
After hitting a high of U.S. $3.99 trillion in June 2014, China's foreign exchange reserves dropped to U.S. $3.23 trillion at the end of January and U.S. $3.2 trillion last month, the lowest level in four years.
As of January, the loss of reserves exceeded the foreign exchange holdings of the euro area and Russia combined, according to data compiled by tradingeconomics.com.
But the February decline of U.S. $28.6 billion, announced Monday by the People's Bank of China (PBOC), slowed markedly from previous drops of about U.S. $100 billion per month in a possible sign of eased pressure on the yuan renminbi (RMB).
Western press reports have focused on fading confidence in China's economy, capital flight and heavy spending by the central bank to defend against drastic depreciation of the yuan renminbi (RMB).
In a recent posting, The Wall Street Journal wrote that "China's economic mandarins are on the defensive in a game that's largely about confidence, ... leading to a pattern of intervention, bad economic news, further yuan depreciation and more intervention."
The PBOC has been seen as fighting the tide of capital outflows as individual savers and investors find ways to convert yuan into dollars and evade China's capital controls.
"As the economy stumbles, individuals and companies are pulling money out of China en masse, leaving the government scrambling to limit the outflows," The New York Times said last month.
Evading capital controls
In a recent report by Washington-based National Public Radio, a young Shanghai resident was asked whether it was hard to convert large sums with official rules that limit exchanges to U.S. $50,000 (325,800 yuan) per person with a government identification (ID).
"Not that hard," the young man said. "You just get more ID."
The shifting of funds by individuals using ID cards from friends and family has added to pressure on the yuan from capital movements by private investment and asset management firms.
While the PBOC has abruptly devalued the yuan twice since last August without explanation, its major challenge has been to keep the currency from falling further as economic growth slides.
Although the issues have drawn international attention, Premier Li Keqiang and the government's top planning agency had little to say about foreign exchange levels or exchange rates during their annual reports to the National People's Congress (NPC) over the weekend.
In its report, the National Development and Reform Commission (NDRC) said it would "improve the market-based exchange rate regime, ... while also ensuring basic stabilityis maintained and the rate remains at an appropriate and balanced level."
"We will exert effective control over abnormal cross- border flow of capital," the NDRC said.
Chinese authorities have blamed a variety of factors for the foreign exchange pressures, first citing the U.S. Federal Reserve Board's decision to raise interest rates.
More recently, officials have blasted predictions of an economic hard landing by billionaire investor George Sorosand hedge fund bets on a big devaluation of the yuan.
In January, the official Xinhua news agency threatened that "radical speculators" could face "potential legal consequences."
But the shift into dollars by individual savers suggests that the strategy of blaming external forces may have had little effect.
In a Caixin magazine interview and a Xinhua commentary on Feb. 13, PBOC Governor Zhou Xiaochuan argued against the perception that China is suffering from capital flight at all.
"It is important to differentiate between capital outflow and capital flight," Xinhua said, citing Zhou. "The capital outflow may not be capital flight."
Technically, capital flight is a large or rapid shift of assets, driven by an event, such as devaluation or fears of instability.
But the largely psychological distinction from more gradual capital outlfow may determine how much -- and how quickly -- pressure comes to bear on the currency.
In February, the South China Morning Post reported that the PBOC had omitted key data from its monthly report, making it harder for analysts to estimate the scale of capital outflows.
Last week, Moody's Investors Service lowered its outlook on China's government credit rating to "negative" from "stable," citing a "continuing fall in reserve buffers due to capital outflows" as one of the factors. The rating agency did not refer to capital flight.
"There is capital flight, I'm quite persuaded," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.
ODI deals mask flight?
Flight was initially spurred by China's anti-corruption campaign, targeting political figures including former Chongqing party chief Bo Xilai and Politburo member Zhou Yongkang, Hufbauer said in a phone interview.
Fears of the crackdown were soon followed by concerns about economic weakening, depreciation and hedge fund forecasts of a larger devaluation to come.
Signs of flight can also be seen in the recent flurry of Chinese outbound direct investment (ODI) deals.
Some, including the proposed sale of the Chicago Stock Exchange to a Chongqing-based investment group, appear to make little financial sense.
"Some of these big merger and acquisition deals are a good way to get wealth into dollars." said Hufbauer.
"This enthusiasm for overseas direct investment, part of it is diversification, part of it is companies feeling that they really want to get some of that money out of China," he said.
In a New York Times column on Feb. 24, Steven Davidoff Solomon, a University of California, Berkeley law professor, cited similar forces at work.
"Chinese companies are desperate to get dollars out of China in anticipation of a further slide in its currency. Foreign acquisitions are an easy solution, since they are encouraged by the Chinese government," Solomon said.
But Yukon Huang, a senior associate at the Carnegie Endowment for International Peace and former World Bank director for China, makes the opposite case.
Logical responses to conditions
A major portion of recent capital outflow stems from Chinese companies paying down foreign debt, taken on in the past when relative interest and exchange rates favored borrowing abroad, Huang said.
With the shifts in interest and exchange rates and the cooling of China's once-hot property market, investors are logically looking for better opportunities overseas.
"People call this capital flight. I don't call it capital flight," said Huang.
"We don't call it capital flight when Americans buy stock in Europe or property in Japan. We call it foreign investment, or we call it diversification, and we actually think that it makes a lot of sense." he said.
At a press conference in Beijing on Sunday, PBOC Vice Governor Yi Gang said that dollar-denominated corporate debt dropped by about U.S. $100-billion last year while banks had also increased dollar holdings by about $100 billion.
Huang noted that China enjoyed a record trade surplus last year of 3.69 trillion yuan (U.S. $565.2 billion), up 56.7 percent in yuan terms from a year earlier, according to General Administration of Customs (GAC) figures.
While the soaring surplus is largely the result of a 13.2- percent drop in imports, it is hardly symptomatic of a country suffering from capital flight, Huang said.
Other analysts also say the trade figures should be seen as support for the yuan.
"The idea that China needs to devalue its currency to reflect a weakening export sector is not borne out by the 2015 trade figures," wrote Tim Condon of the ING Group in comments cited by The Wall Street Journal.
"Worries that something is going on in China behind the scenes, that real compelling economic fundamentals are pushing the yuan weaker, is inconsistent with what we're seeing on the trade front," Condon said.
But this is where the track gets muddy.
In the past, China's trade figures have been periodically skewed by illicit flows of "hot money," disguised as "phantom exports" or artificially priced re-imports to evade capital controls. The accuracy of the data is anyone's guess.
Despite the arguments over capital outflow and capital flight, experts expect more devaluation ahead.
Analysts have been trying to predict how low the PBOC will be willing to let foreign exchange reserves fall before it pulls out its costly support for the yuan.
"If it drops down to (U.S.) $2.5 trillion from where it had been at close to $4 trillion, at that point I think you could say depreciation is inevitable," Gary Hufbauer said.
But Hufbauer believes the PBOC will hold the exchange rate "roughly at current levels through the end of this year."
As this year's host of the G-20 group of major economies, China will likely seek to avoid international criticism and keep confidence in the currency at least through the summit of national leaders in September, he said.
At the meeting of G-20 finance ministers last month, the group agreed to improve communications but stopped short of a rumored deal to realign exchange rates.
Yukon Huang said that China has largely held the line on exchange rates until now to establish the yuan as a global currency, while other countries have already made larger adjustments to a stronger dollar. The yuan is now due for its adjustment, he said.
"How much, no one knows, but my guess is between 5 and 10 percent," Huang said, estimating the depreciation could take place over two or three years.
"Is that a capital flight or a crisis? Not really. It's because the exchange rate is too strong." he said. "Everybody else's exchange rate has fallen by 25 to 30 percent."