How China’s $1.2 trillion surplus could threaten global economic stability – Firstpost

Data from China’s currency market regulator show that investors in the country’s so-called non-official sector boosted their overseas asset holdings by more than $1 trillion in the first three quarters of last year, more than twice the average annual increase seen over the past decade

China’s record trade surplus is rippling across global markets, as export earnings that once flowed straight into state reserves are now being channelled into large-scale private investments overseas, spanning securities purchases and business expansion abroad.

Instead of parking most of last year’s $1.2 trillion surplus with the central bank, nearly two-thirds of the foreign assets generated through trade were absorbed by companies, individuals and state-linked lenders. The shift increases the risk of abrupt capital reversals beyond China’s direct control, particularly at a time when the yuan is permitted greater room to appreciate.

STORY CONTINUES BELOW THIS AD

Private capital surges overseas

Data from China’s currency market regulator show that investors in the country’s so-called non-official sector boosted their overseas asset holdings by more than $1 trillion in the first three quarters of last year, more than twice the average annual increase seen over the past decade.

Putting that money to work last year resulted in a $535 billion surge in Chinese private investment in overseas securities, including US equities, European bonds and mutual funds, according to Bloomberg calculations, even though a detailed country-wise breakdown remains unavailable.

A break from China’s centralised playbook

This largely unseen flow of capital into global markets marks a decisive break from China’s long-standing, centralised approach to managing the wealth generated by its manufacturing and trade dominance.

For a world already unsettled by deep trade imbalances, the shift carries a further implication: a global financial system growing steadily more dependent on liquidity originating in China.

“As China’s private investment footprint grows, it will inevitably play a larger role in global capital flows,” Peiqian Liu, an Asia economist at Fidelity International, told Bloomberg News.

How durable this shift ultimately proves will hinge largely on developments within China itself. What is already clear, however, is that it is building up risks, both for overseas markets and for China’s own financial system.

In the event of a rapid yuan appreciation and fund repatriation, Liu said: “We could witness a chain reaction of exporters settling their foreign exchange and capital inflows increasing, leading to a fundamental directional reversal.

With greater latitude from Beijing in deploying these funds, Chinese institutions are moving deeper into the core infrastructure of global finance, making them more resilient to sanctions and increasingly difficult for Western regulators to monitor.