Components of China's Currency Outflow (I)

choi

Patrick Graham, REFILE-Carry Trades at Heart of China Capital Outflows -BIS. Reuters, Mar 6, 2016.
http://www.reuters.com/article/bis-china-idUSL5N16E007

Note:
(a) "Of $175 billion in cross-border capital flows out of China in the third quarter, $40 billion was because of such reductions in offshore deposits. Banks in those jurisdictions responded by drawing down deposits with mainland banks, leading to a total capital outflow of $80 billion."
(i) The emphasis is on the 3Q15 --4Q15 is not included, yet.
(ii) Basically, the two sentences say off-shore banks (ie, outside PRC) have to withdraw their yuan deposits inside PRC, in order to replenish their yuan deposits (outside PRC).  

(b)
(i) " 'The combination of reduced offshore renminbi deposits and Chinese firms' paydown of foreign currency debt reflects the unwinding of carry trades and explains the downward pressure on China's currency,' said Hyun Song Shin, BIS Economic Adviser and Head of Research."

Currency Carry Trade. Investopedia, undated.
http://www.investopedia.com/terms/c/currencycarrytrade.asp
(ii) What Is Carry?  Wall Street Oasis, undated
www.wallstreetoasis.com/finance-dictionary/what-is-carry
(iii) carry (investment)
https://en.wikipedia.org/wiki/Carry_(investment)
(The currency carry trade is an uncovered interest arbitrage.  The term carry trade, without further modification, refers to currency carry trade: investors borrow low-yielding currencies and lend (invest in) high-yielding currencies")

(c) The original report:
(i) BIS Quarterly Review. Mar 6, 2016.
https://www.bis.org/publ/qtrpdf/r_qt1603.htm

> The pertinent portion is one of the sidebars ("Quarterly Review boxes") in the report. The sidebar is:

"Dollars and renminbi flowed out of China. by Robert Neil McCauley and Chang Shu" (at pages 26-27 of BIS Quarterly Review, March 2016)
https://www.bis.org/publ/qtrpdf/r_qt1603u.htm
(the last word: "To recap, our analysis suggests that recent outflows from China can be explained, to a large extent, by continued shrinkage of the offshore renminbi market and Chinese firms' paydown of net foreign currency debt. The PBoC's declared intention to keep the renminbi stable [against a basket of foreign currencies, rather than against dollar alone] in effective terms would imply a weaker renminbi against the dollar were the dollar to appreciate against major currencies. In this event, offshore depositors might not hold onto maturing renminbi deposits and Chinese firms would still have reason to repay dollar-denominated debt")
(ii) It seems to me that whether PRC Chinese were, in 3Q15, (A) selling mainland assets to take money out (and investing in foreign, dollar-denominated assets) or (B) paying down their dollar debt 00 bith moves in anticipation of dollar appreciation relative to yuan. These two move are the same, or at least two sides of the same coin -- Chinese want to take advantage of appreciating dollar; money outflow is money outflow.