China: capital flight or renminbi internationalization?

During 2014–2016, many analysts have claimed the occurrence of a capital flight in China due to the reduction of the country's foreign reserves by over US$800 billion. This paper aims therefore to answer the question: did China really undergo a capital flight in this period? Its methodology includes a detailed analysis of the Chinese external stocks and flows between 2014 and 2016, and an examination of the currency hierarchy and the international usage of the renminbi (RMB). The authors conclude: the fall in the foreign reserves that occurred in China in 2015–2016 was partially due to (i) a strategy of the Chinese government to diversify its international assets; and (ii) Chinese residents (private entities) increasing their foreign-asset holdings. Besides that, there did indeed occur a capital flight in China in 2015–2016, mostly due to a reduction of the non-resident deposits and loans, but these outflows were partially in RMB. Due to that core difference, the effects on the domestic economy are much lower. Furthermore, the RMB outflows may contribute to the internationalization of the RMB.