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Capital outflows look to be easing

Wang Yanfei
Updated: May 17,2016 7:46 AM     China Daily

A narrowed decline in foreign exchange bought by the central bank last month indicates capital outflows from China are easing, contributing to yuan stabilization, according to analysts.

The People’s Bank of China said yuan holdings for foreign exchange purchases held by Chinese financial institutions fell by 54.4 billion yuan ($8.3 billion) to stand at 23.78 trillion yuan in April.

Although the data mark the sixth consecutive month that the figures have declined, the margin has narrowed sharply compared with falls in previous months, especially the record plunge of 708 billion yuan in December.

As the yuan is not freely convertible under the capital account, the central bank has to buy foreign currencies mainly generated by China’s trade surplus and foreign investment from commercial banks, adding liquidity to the money market.

The latest central bank data point to relieved pressure on capital outflows at a time when concerns have arisen over such outflows since falls in the yuan when China revamped its foreign exchange rate formation mechanism last year.

Relief has also come from a mild increase in the foreign exchange reserves last month.

Liu Jian, senior analyst at Bank of Communications, attributed the narrowed decline in foreign exchange purchases to recent weakening of the US dollar and China’s tightened controls on cross-border capital flows.

Xie Yaxuan, chief analyst at China Merchants Securities, said rising economic indicators in the first quarter and improved market sentiment point to reduced pressure on capital outflows in the near term.

Xie expects further falls in foreign exchange purchases in the second quarter, when the central bank is likely to use monetary tools and liquidity injection to stabilize the yuan exchange rate.

Cao Yuanzheng, chief economist at Bank of China, said, “Although the figures are expected to decline further ... this should not add to concerns over increasing capital outflows, as fluctuation is normal and is affected by other factors.”

Cao said some factors may have a bearing on the level of China’s foreign exchange purchases in the longer term, as the US Federal Reserve has left the door open to raising interest rates in June, and the Chinese economy still faces “uncertainties”.

“The central bank may have to seek alternatives to improve liquidity at a time when monetary policies are expected to remain prudent,” Cao added.