China's economy is once again in turmoil, grappling with a massive outflow of capital. However, experts assure that the situation will improve next year.

In the final month of autumn, China witnessed the largest capital outflow from its financial markets in recorded history. This was due to investor concerns over potential tariff hikes from the administration of US President-elect Donald Trump.

Driven by uncertainty, many Chinese banks wired a net $45.7 billion of funds overseas on behalf of their clients for securities investment. According to reports from China's State Administration of Foreign Exchange, this figure included foreign investment in China as well as local residents' purchases of overseas securities.

Growing capital outflows from China signal a deteriorating investment climate. President-elect Trump's promise to impose a 60% tariff on Chinese goods is adding fuel to the fire. As a result, mutually beneficial trade relations between Washington and Beijing could crack under pressure. The weakness of the yuan and Chinese equities, coupled with significant interest rate differentials between China and the US, increases the risk of a vicious cycle of capital flight.

"US tariff threats and interest rate differential factors are expected to fuel outflow pressure from China," Ken Cheung, senior Asian FX strategist at Mizuho Bank, said.

Since October 2024, Chinese stocks have been on a downward trajectory as the stimulus measures introduced by Chinese authorities have failed to meet market expectations. Currently, the yield on benchmark Chinese government bonds is less than half that of US Treasuries.

However, the Chinese authorities are determined to revive the national economy and shift investor sentiment to redirect capital back into domestic assets. At a key policy meeting last week, the government approved increased government borrowing and spending for 2025. It also expressed the need to recalibrate its policy toward consumption-driven growth to stimulate the economy. Next year, Chinese officials plan to maintain a moderately loose monetary policy, which could mean further interest rate cuts.

According to ChinaBond data, foreign institutions reduced their holdings of Chinese government bonds to 2.08 trillion yuan ($285.5 billion) in November, marking the lowest level since September 2023.

Bloomberg estimates that in the final month of autumn, mainland Chinese investors bought HK$125 billion ($16 billion) worth of Hong Kong-listed securities. This is the highest level in the last three years.