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(Bloomberg) — China’s capital outflows rose to a record in July, driven by mainland investors’ aggressive buying of Hong Kong assets following new market liberalization measures.
Domestic banks wired a net $58.3 billion of funds overseas on behalf of their clients for securities investment last month, according to data released late Friday by the State Administration of Foreign Exchange. That’s the highest monthly outflow since records began in 2010.
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The steeper capital outflow was partially attributable to mainland investors’ hefty buying of Hong Kong stocks this year and the July expansion of the Southbound Bond Connect program that allows more offshore debt investments. Meanwhile, foreign funds continued trimming their holdings of Chinese bonds, likely due to their diminishing relative appeal compared with riskier assets and global alternatives.
China is expected to tolerate some capital outflows this year, leveraging a weak-dollar environment to gradually liberalize its capital account — a step aimed at helping the yuan’s long-term globalization. In June, regulators raised the amount of money that approved investors can allocate into overseas assets for the first time in more than a year.
Onshore investors bought 12.6 billion yuan ($1.8 billion) of overseas debt through the Southbound Bond Connect in July, the highest monthly total this year, according to data compiled by Bloomberg. The increase followed the Hong Kong Monetary Authority’s early July announcement expanding access to the channel for Chinese non-bank financial institutions, including securities firms, fund companies, insurers and wealth managers.
Outbound investment through approved channels will likely continue to grow this year as “domestic investors reconsider their portfolio amid improving risk appetite,” said Lynn Song, chief Greater China economist at ING Bank NV. While the outflows may initially seem to pressure the yuan, actual risks are likely contained due to anticipated US interest rate cuts and a narrower China-US yield gap, he said.
Offshore institutions’ holdings of Chinese bonds in the interbank market dropped about 300 billion yuan in July to the lowest since January 2024, data from the People’s Bank of China show. The decline suggests overseas funds joined a broader selloff of debt, influenced by easing US-China trade tensions and Beijing’s efforts to combat deflation.
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The fading appeal of Chinese negotiable certificates of deposits — a once-popular trade that attracted foreign funds — is also contributing to broader bond outflows. Foreign holdings of NCDs fell by about 15% in July — or by 167 billion yuan — a third straight month of accelerated declines.
(Updates with analyst comment, foreign bond holding details from fifth paragraph.)
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