Will China’s Capital Inflows See A U-Shaped Recovery?

Capital inflows into China will make a U-shaped recovery during the second half of this year, forecasts BofA Merrill Lynch in a research report.

The bank estimates that on a quarterly basis, China saw a plummeting capital inflow from US$127 billion in the first quarter to only US$10 billion in the second quarter. On a monthly basis, capital inflow slumped from US$69 billion in January to US$4 billion in May.

After that, there was net capital outflow of US$15 billion in June and US$12 billion in July. But if considering the rapidly rising inflow of offshore RMB in the past couple of months, total capital outflows might actually be negligible.

BofA Merrill Lynch says that the declining capital inflows and capital outflows in the summer are mainly due to the depreciating RMB, sinking confidence in the Chinese economy, worries on China’s financial stability, and the falling interest rates.

With appreciating RMB since the end of May, the stabilization of China’s GDP growth, and renewed interest in China’s financial assets, BofA Merrill Lynch expects the outflow in June and July will be short-lived. Capital inflows into China will rise during the second half.

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