Assessing China’s recent capital outflows:Policy challenges and implications

China has experienced a dramatic swing from net capital inflows to large net outflows in recent years.The recent capital exodus to some extent reflects policy difficulties and obstacles that China’s authorities face in managing economic reforms.In particular,China faces tough challenges in balancing the benefit/risk trade-off from capital account opening and attempting to introduce more flexibility to the currency.Moreover,the lack of policy clarity highlights policy inconsistencies and ambiguities among Chinese leaders in macroeconomic management,as more often than not,government policies seem to alternate between emphasizing reform and growth.This may cast doubt on the Chinese leadership’s commitment to reform,undermine confidence in the economy and cause further capital outflows that will have significant repercussions both for China as well as for the world.