The third quarter of 2024 marked a pivotal moment for the Chinese economy, as various factors converged to create an environment for a notable rebound in the Renminbi (RMB) against the US dollarThis resurgence occurred amidst changing domestic macroeconomic policies, a boost in market confidence, growing expectations of monetary easing abroad, and a weakening US dollar indexSpecifically, the RMB's midpoint and onshore and offshore trading rates strengthened from approximately 7.10 and 7.30 to around 7.0 to 1, recovering from earlier declines earlier in the year and reducing the apparent divergence among these rates.

Traditionally, a strengthening currency is expected to correlate with capital inflows, while depreciation often leads to capital outflowsHowever, an analysis of the US Treasury's International Capital Flow (TIC) report alongside China's State Administration of Foreign Exchange's Balance of Payments (BOP) data revealed a contrasting scenario in Q3 2024. During the period when the RMB appreciated, the US attracted a record influx of international capital, while China faced significant capital outflows, illustrating the complexity of currency movements and the multitude of factors influencing them.

This RMB rebound coincided ominously with a resurgence of global dollar scarcity, reminiscent of the conditions seen back in 2022 when aggressive tightening by the Federal Reserve propelled the dollar index (DXY) up by 7.8%. During that year, the US recorded a staggering $1.62 trillion net inflow of international capital in cross-border securities investment, a growth of 46.9% year-on-year

Fast forward to 2023, and as the Fed slowed its pace of rate hikes, the dollar index declined by 2.0%, reflecting a relief in the global dollar shortage contributing to an environment of rising assets across stocks, bonds, and currencies.

Halfway into 2024, the dollar index nudged higher, reflecting rising inflation in the US and a delayed first rate cut by the Fed, yet net capital inflows into the US plummeted by 71.5% compared to the previous yearAs Q3 approached, the combination of persistent easing expectations from the Fed and the actual first rate cut led to a significant dip in the dollar index by 4.8%. This was coupled with a remarkable surge in capital inflows into the US—reporting $631.9 billion, a tripling from the previous quarter and a year-on-year growth reflecting a reinvigorated investor confidenceBy the end of the third quarter, total US capital inflows surged to $725.2 billion for the first nine months, signifying a robust recovery from earlier dips.

Dissecting the figures, it was the private foreign capital that constituted the lion's share of this inflow, accounting for an astonishing $560.6 billion, marking a year-on-year increase of 76.6%. Government capital inflows, though lower at $71.4 billion, also saw a significant increase, demonstrating the shift in market dynamics

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This marked a stark contrast from the earlier dollar shortage crisis two years prior, when many economies were compelled to liquidate their foreign reserves to stabilize their own currencies.

Another point of intrigue was the operational mediums through which this capital made its way into the USForeign investors were particularly keen on purchasing US stocks, net buying $230.3 billion, indicative of a staggering 57.8% increase compared to the previous yearAdditionally, net purchases of US Treasury bonds amounted to $246.3 billion, reflecting a historical re-engagement from foreign investors after an earlier period of underperformance in the markets, and presenting a stark turn of fortunes within just a few quarters.

However, during the same period, Chinese investors exhibited a different trendDespite the broader capital inflow wave refreshing the US market, China saw its own investors net selling US long-term securities to the tune of $54.3 billion, a stark contrast that climaxed over the course of 2024. The actions suggest a cautious approach among Chinese investors amid rising prices in US stocks, adopting a strategy of reducing exposure and taking profits instead.

Interestingly, data from October 2024 continued to reflect the nuanced dynamics at play, with the US attracting a substantial $203.9 billion, despite a sharp decline from the historical monthly record set in September

The dollar index even managed a minor recovery, closing out October with a competitive reboundThis contradicts expectations of a depreciating dollar cycle following the Fed's easing, as the dollar index concluded the year elevated at 108.48, ultimately posting a 7.0% increase over the course of 2024.

The pressure of capital outflows from China nonetheless was notable but did not preclude the RMB's recoveryThe third quarter of 2024 witnessed a substantial rise in China's capital outflow pressure, which, despite the economic signals of recovery and stabilization, highlights the intricate balance between domestic conditions and international influencesChina reported a current account surplus of $147.6 billion, showcasing its robust trade performance, while simultaneously grappling with a capital account deficit—a reflection of heightened external investments.

Addressing the breakdowns, the significant increase in capital outflow was primarily concentrated in other investment streams, revealing deeper trends of shifting strategies among Chinese investors