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November 22, 2011

Chinese forex purchases fall on outflows

Top Story

November 22, 2011

BEIJING: China’s foreign exchange purchases, a gauge of foreign capital flows, fell in October for the first time in four years, as a slowing Chinese economy and mounting global uncertainties led some investors to withdraw speculative funds.
Foreign exchange purchases fell in October for the first time since December 2007, slipping 24.9 billion yuan ($3.9 billion), central bank data showed on Monday.
A sharp reversal from months of relentless gains, the decline suggested capital was flowing out of the world’s No.2 economy, which would exert more pressure on the central bank to relax monetary policy to support investor confidence, some analysts said.
To hold down the yuan, Beijing is typically a net buyer of foreign currencies entering China through trade or illegal speculative bets. As a result, China has the world’s largest foreign exchange reserves at $3.2 trillion.
“It’s a big change, a real big change that China has to learn to handle,” said Cui Yong, the managing director of Taugast, a Beijing-based private equity investment fund. “China is not going to raise interest rates, the economy is set to slow, so there are good reasons for short-term money to move out.”
Some analysts said the fall in foreign currency purchases also suggested the authorities had intervened in markets to buy yuan and prevent the unit from falling — a marked departure from its usual practice of trying to suppress gains in the currency.
“The drop is rare and sharp, and happened when market concern about a hard handing for the economy were at a peak,” said Hua Zhongwei, an economist with Huachuang Securities.
“It’s certain that capital flows are more volatile,” Hua said, adding that the situation had probably stabilised for now and that an exodus of cash was unlikely. “If you look at the offshore yuan market, you can see that yuan appreciation is again the trend, not depreciation,” Hua said.
The State Administration of Foreign

Exchange, the country’s watchdog for capital flows, said on Monday that it would continue to crackdown on illegal cross-border capital flows, particularly hot money inflows.
Still, the central bank, which has started to tweak its policy focus to supporting growth from fighting inflation, is not rushing to cut bank required reserves, analysts said.
Zhong Wei, a professor at Beijing Normal University and editor of the official journal published by China’s foreign exchange regulator, said he did not expect an imminent cut in required reserves despite a fall in foreign exchange purchases.
“There is no direct link between the monetary base and foreign exchange purchases,” Zhong said.
Cui at TAUGAST said the central bank would not cut the nominal required reserve ratio until the second quarter of 2012. “It needs a few more months to observe,” Cui said.

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