Capital outflows from China are accelerating. The hemorrhage has reached the fastest pace since the currency panic at the start of the year.

The latest cycle of credit-driven expansion has already peaked after 18 months. Beijing has had to slam on the brakes, scrambling to control property speculation that the Communist authorities themselves deliberately fomented.

How this episode could have happened is astonishing, given that premier Li Keqiang has warned repeatedly that excess credit is becoming dangerous and will ultimately doom China to the middle income trap.

It will be clear by early to mid 2017 that the economy is rolling over and that the underlying 'quality of growth' has deteriorated yet further. "We think the recovery will run out of steam early next year," said Chang Liu from Capital Economics.

This stop-go rotation - an all-too familiar pattern - coincides with an incipient liquidity squeeze in global finance as dollar LIBOR and Eurodollar rates ratchet upwards. A rate rise by the US Federal Reserve will clinch it.

Since the commodity rebound is in great part driven by demand for Chinese industry and construction - and by a touching belief that China's economy will sail majestically through 2017 - this looming slowdown spells trouble.

Stress is already visible in the capital account. Morgan Stanley estimates that net outflows reached $44bn in September. Capital Economics thinks the figure was closer to $55bn, led by a surge in purchases of off-shore securities through the Shanghai-Hong Kong Stock Connect Scheme.

This does not yet match the capital flight seen late last year when a mismanaged shift in exchange rate policy set off outflows averaging $70bn a month, and triggered the global equity rout of January and February. But it is nearing a neuralgic threshold for currency traders.

David Fuller's view

China has an entrepreneurial, organised economy and an increasingly educated population.  However, it also has a heavy-handed ruling bureaucracy, which is a recipe for corruption.  Against that background it is hardly surprising that anyone who makes a significant amount of money, including bureaucrats, wants to get as much of it out of China as it can. 

Here is a PDF of AE-P’s article.