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Why the Yuan’s Slide Is Affecting Capital Flows in China

Surbhi Jain

In Case You Haven’t Noticed, China’s Growth Drivers Are Changing!

(Continued from Prior Part)

Government backing purchases of foreign assets

As we discussed in Part 3 of this series, we’re seeing increasing M&A (mergers and acquisitions) in China. China (FXI)(YINN)(ASHR) is promoting and backing state-owned enterprises for investing in foreign assets in technology, energy, and infrastructure.

We’re now seeing China dominate emerging market capital outflows. According to a report released by the Institute of International Finance, total net capital outflows from emerging markets (EEM)(EDZ)(EDC) in 2015 amounted to $735 billion, compared to $111 billion in 2014. A significant portion of this total, about $676 billion, came from China.

The yuan’s slide has fueled the spree

The Chinese economy is heading toward a significant investment flow shift. From a predominant inbound flow of capital and resources, the economy is now also focusing on its outbound investment flows, facilitated to a good extent by its foreign M&A spree.

The surge in outbound M&A deals from China is due to the sliding yuan. After appreciating by about 30% over the last decade, the yuan reversed its trend in 2014. Since early 2014, the yuan has already depreciated 8% against the US dollar. Markets estimate that the yuan will fall another 10% in 2016. Hedge funds are also expecting the yuan to fall more. George Soros, David Tepper, and Bill Ackman are all seeking to profit from the depreciating yuan.

With expectations of the yuan falling further, people seeking mergers and acquisitions abroad are doing so now, before the currency slides further and makes their foreign assets purchases even more expensive.

A quick glance at the areas where these M&A had focused when the economy’s growth was linked to industrialization and exports and the current areas, now that we see consumerism-driven growth, gives you proof of China’s renewed focus.

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