Foreign Exchange Market

Beijing extends currency buying

PUBLISHED : Saturday, 17 March, 2012, 12:00am
UPDATED : Saturday, 17 March, 2012, 12:00am


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China was a net purchaser of foreign currency for a second straight month in February, reflecting increasing capital inflows, easing liquidity conditions and rising confidence in the yuan last month, economists said.

The People's Bank of China bought a net 25.12 billion yuan (HK$30.74 billion) of foreign currency last month compared with a net purchase of 140.9 billion yuan in January, after three consecutive months of net sales, the central bank said.

'This shows that the country has seen net capital inflows again for the past two months and the central bank needs to purchase foreign currency to keep the yuan at its current level,' said Liu Ligang, Australia and New Zealand Banking Group's chief China economist.

The fact that China received a net capital inflow in February despite the largest trade deficit in a decade and a drop in foreign direct investment showed that more investors, including commercial banks, could be selling US dollar assets, and buying more yuan in February, said Liu.

China posted a US$31.5 billion trade deficit last month.

Lu Ting, an economist at Bank of America-Merrill Lynch, added that the data reflected rising confidence in the Chinese economy in February, leading to less capital flight.

But Lu said market sentiment had changed since then, with investors upbeat and expecting further appreciation in the yuan against the US dollar during Vice-President Xi Jinping's visit to the US last month.

However, yuan exchange rate volatility has picked up again, especially after central bank governor Zhou Xiaochuan said this week that the yuan was getting closer to fair value against foreign currencies, rejecting international calls for Beijing to accelerate the yuan's appreciation.

China's foreign currency reserves - which are the world's largest - totalled US$3.181 trillion at the end of December.