China rejects new curbs to tighten control of cross-border capital, although outflow pressure surged suddenly last month, the foreign exchange regulator said on April 23.
Foreign exchange settlement by Chinese banks reached an eighth consecutive month of deficits in March, rising to a record-high $66 billion, up from $17.2 billion in February and $8.2 billion in January, the State Administration of Foreign Exchange said. In the first three months of the year, the total deficit rose by 97 percent from the fourth quarter of last year.
The figures suggest sharply increased capital outflow pressure recently, with the trade surplus dropping sharply to a 13-month low of $3.08 billion last month, down from $60.6 billion in February.
Meanwhile, Chinese enterprises accelerated foreign debt repayment on expectations of a stronger US dollar. Guan Tao, head of the Foreign Exchange Administration’s Department of International Payments, denied that the government will introduce new measures to curb capital outflows, saying the recent ones have been within expectations.
“This is not capital flight through illegal or unsanctioned operations,” he said at a news conference on April 23. “But we need to stay vigilant and take precautions against risks.”
Guan said the foreign exchange market is stable and conforming to a macroeconomic target of achieving equilibrium in the international balance of payments.
The supply of foreign exchange remains adequate, and there has been no market panic even when the renminbi exchange rate fluctuates violently, Guan said. “The RMB remains a strong currency in the world, and its internationalization process is accelerating.”
Last month, the funds outstanding for foreign exchange－an indication of the base currency supply corresponding to changes in foreign exchange assets－fell by 156.47 billion yuan, the largest drop since 2007.
The foreign exchange assets of the People’s Bank of China, the central bank, fell by 252 billion yuan in the first quarter, dropping by 231 billion yuan in March alone.
On April 19, the bank cut the reserve requirement ratio－the cash that financial institutions must deposit in the central bank－by 1 percentage point to offset the shortage in base money supply and increase market liquidity.
Economists predict that further action will be taken by the government to slow capital outflows, including an additional benchmark interest rate cut in the second quarter. On March 31, during an interview with the Financial Times, Premier Li Keqiang made it clear that he does not want to see the RMB exchange rate depreciating, and the government will focus on boosting domestic demand.
Zhu Haibin, chief China economist at JPMorgan Chase & Co, expects China to accelerate the capital account convertibility process this year, but not to “full convertibility”. Zhu expects the renminbi to be relatively stable against the dollar but adds,” Two-sided volatility will remain, and the RMB could depreciate by 1 to 2 percent against the dollar during 2015.”