Fears are rising that Britain’s vote to leave the European Union has sparked another bout of renminbi depreciation and capital outflows from China, on the back of a strengthening dollar.

If the trend continues, it would wreak havoc on global markets, said Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners in Hong Kong.

A post-Brexit rush by China investors into Hong Kong stocks was one example of money being moved offshore. The Shanghai-Hong Kong Stock Connect recorded Rmb18.5 billion of net southbound flows from June 24 to July 6, fully a third of all southbound flows during May and June and one-fifth of the total for the whole year.

Hong Kong dollar assets benefited from the stronger greenback, which is why mainland investors poured into H-shares in late June, said a business operations manager at Guangzhou-based GF Securities. 

Moreover, China may rethink its overseas investments after Brexit, said Lo; previously it had favoured the UK as a springboard into continental Europe, but that may now change, which is likely to benefit the US in terms of flows.   

The vote for 'Brexit', confirmed on June 24, has sparked extreme currency volatility as investors have sought safe havens. Since the referendum, the dollar has risen 13% against sterling and 1.6% against the renminbi, while the DXY index – which tracks dollar strength against a currency basket – has jumped 4.65%.

If the greenback continues to surge, the People’s Bank of China is likely to allow the RMB to fall further against US currency to support its export levels. This may trigger another round of yuan devaluation, causing volatility similar to that seen early this year, when the central bank allowed renminbi to weaken against the dollar, said Lo.

Other China economists share his view. UBS’s Zhang Ning said the renminbi was likely to slide further, suggesting it would drop to to 6.8/dollar in the second half from 6.68 yesterday, a decline of 1.79%. 

More RMB weakness could re-ignite capital outflows from China, which were seen to have stabilised in the past few months. Zhang said pressure for mainland capital flight had revived on June 24, but that the scale of outflows would be limited by the reported escalation of capital controls. 

Fang Shangpu, deputy administrator of the State Administration of Foreign Exchange (Safe), said on July 5 that China’s capital outflows had stabilised between March and May, speaking at the Boao Forum for Asia in Hong Kong.

China’s foreign reserves stood at $3.2 trillion as of June, having grown Rmb13.4 billion from $3.19 trillion in May, according to Safe. This comes after reserves fell from their peak of $3.99 trillion in June 2014, with a particularly sharp drop from $3.53 trillion to $3.2 trillion between last October and February this year.