The 500-billion-dollar reason the US Treasury has been soft on China recently

The owner of a currency exchange counts Chinese renminbi in Hong Kong on Oct. 31, 2006.
The owner of a currency exchange counts Chinese renminbi in Hong Kong on Oct. 31, 2006. 

China is bleeding money.

More than $500 billion left the world’s second-largest economy in the first eight months of the year, roughly equivalent to Norway’s entire gross domestic product.

In the first half of 2015 alone, China's capital outflows excluding foreign direct investment (FDI) reached $250 billion, nearly 10 times the amount taken out of the country in the same period in 2014, according to calculations released by the US Treasury this week.

(In this case non-FDI capital outflows refer to money from assets such as stocks, bonds and real estate in China being transferred overseas.)

That’s a lot of money by any measure, and it’s complicating the job of Chinese policymakers who are struggling to boost economic activity and keep the currency, which is formally called the renminbi, stable.

To be fair, huge capital outflows are not just a China problem.

Central bankers in emerging markets around the world are struggling to stem the surge of funds leaving their countries.

The Institute of International Finance this month estimated that emerging markets, including Brazil, Mexico and India, will record a net outflow of capital this year for the first time since 1988.

The main reason is US interest rates, which have been at near zero since 2008, but are poised to increase for the first time in almost a decade.

The Federal Reserve has indicated (repeatedly) that it would like to raise the federal funds rate this year. It’s held off so far because of concerns about a weak global economy and low US inflation, which higher interest rates could exacerbate.

Anticipation of a US interest rate hike has triggered an investor stampede into dollar-denominated assets. Investors are betting on interest rates rising more than once, thus offering better returns on their money. Dollar investments also offer protection from a global economic downturn.

But in China, capital outflows are also being driven by fears that the Asian economic powerhouse is slowing faster than expected, and that Chinese leaders, renowned for their ability to work economic miracles, have run out of tricks. China's economy grew 6.9 percent in the latest quarter from a year ago, the slowest pace since the global financial crisis — but some suspect the true figure could be even worse.

The outflows are large enough to turn even the well-dyed mops of some Chinese policymakers grey.

The Treasury estimates non-FDI capital outflows likely hit between $520 billion and $530 billion in the January to August period.

In August alone, capital outflows surged to $200 billion. That's when China suddenly devalued its currency and sparked turmoil in global financial markets as investors fretted that the unexpected move could a) trigger a currency war or b) mean things were a lot worse than Beijing had been letting on.

There are signs outflows were severe in September as well. 

Those outflows have been exerting downward pressure on the value of the renminbi. That might be great for Chinese exports, but it’s not so good if it undermines confidence in the Chinese economy — who wants to invest in a country that could collapse? — and fuels expectations for further falls in the value of the currency.

In response, China’s central bank spent an estimated $230 billion in July, August and September to support the currency, which contradicts Beijing’s stated aim of letting market forces play a bigger role in determining its value.

This policy dilemma might explain why the US Treasury went softer on Beijing over its foreign exchange rate policy in its latest semi-annual report to Congress, which offers an assessment of the economic and currency policies of America's major trade partners.

Treasury said the Chinese currency was “below its appropriate medium-term valuation.” A few months earlier it had described the renminbi as “significantly undervalued.”

The newer report also noted that "market factors are exerting downward pressure on the RMB at present, but these are likely to be transitory." 

The United States cutting China some slack. Now that could be a first.