The country's efforts to slow down an exodus of capital in recent years have worked and are likely to remain in place for some time, the bank argues.

Efforts by Chinese authorities to thwart citizens and businesses from taking large amounts of capital out of the country are bearing fruit – shown by a stabilisation to the Chinese currency. The policy is likely to continue for some time, according to an analysis by Northern Trust, the US-headquartered bank.

“We have predicted before in this space that Chinese policy makers would continue to rely on capital controls and exchange rate management to sustain financial stability. This effort has been taken to a new level, with significant effect,” Carl Tannenbaum, chief economist and Ankit Mital, associate economist at the bank, said in a note.

“We believe China is likely to continue with a strong yuan [aka renminbi] policy for a number of reasons. Firstly, as we noted at the start of the year, sustained weaknesses in currency and capital outflows are mutually self-reinforcing. A significant reversal of yuan’s recent stability would likely prompt another round of outflows. This would hurt the recent revival in investor sentiment around China and jeopardise the success of recent capital controls,” the bank’s authors said.

“Secondly, a strong yuan is consistent with the objective of rebalancing the Chinese economy towards domestic consumption. It serves to make imported goods more expensive, and promotes home-grown products,” they said.

The authors note that in 2014, the yuan weakened amid a steady outflow of capital from China. The next few years saw Chinese foreign reserves decline by about a trillion dollars. Reserves continued to decline until January 2017, at which point they fell below $3 trillion. However, that decline in foreign reserves has been reversed and the yuan has stabilised against a basket of global currencies (and has appreciated significantly versus the dollar).

The bank illustrates the shift in outflows and inflows through the following charts:

For some time, while China had controls over capital account transactions, businesses and individuals found ways to defeat them, through ploys such as over-invoicing or under-invoicing of external trade, or overpaying for investments abroad, particularly in property.

The outflows had a number of causes, such as investor worries about whether China’s domestic financial system was vulnerable, fears about overvalued property, and worries about being singled out amid anti-corruption drives by the new ruling establishment in the governing Communist Party. Outflows accelerated in 2015 and 2016. The Northern Trust note stated that China could have acted faster to curb outflows, but was mindful that a draconian approach would not help its case for having the yuan included in the International Monetary Fund’s Special Drawing Rights currency basket regime.

China began to go after outflows more aggressively in late 2016, targeting “irrational investments”, as the Northern Trust note said, or capital transfer schemes that pretended to be overseas asset purchases.

Overseas investments in sports, leisure and clubs, for example, have been hit. Authorities have also targeted other areas, such as gambling. M&A deals have been subjected to further controls.