Strong yuan and exports pull in more capital

This is not likely to last because of global problems and checks on exchange rate

PUBLISHED : Saturday, 17 November, 2012, 12:00am
UPDATED : Saturday, 17 November, 2012, 4:23am


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There were net capital inflows to the mainland for a second month in October. But it is unlikely to be sustained owing to global uncertainty and the yuan's stabilising exchange rate, analysts said.

The mainland central bank and commercial banks bought a net 21.6 billion yuan (HK$26.9 billion) of foreign exchange last month, after net purchases of 130.7 billion yuan in September, People's Bank of China data released yesterday showed.

The strength in the yuan exchange rate was one reason financial institutions were keen to increase their foreign exchange holdings, said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.

Some analysts said the pickup in exports and rebound in the economy also spurred capital inflows. The currency has remained strong since last month, when signs of an economic recovery surfaced.

The yuan exchange rate closed at a record of 6.2252 against the US dollar on Wednesday, the closing day of the 18th party congress.

The net purchases last month were significantly lower than in September, when China's exports rebounded and the US Federal Reserve announced its third round of quantitative easing.

Liu Dongliang, a currency analyst at China Merchants Bank, said the decline last month could be due to more capital outflows than in September, while intervention by the central bank could be another reason.

Analysts said the trend of capital inflows remains uncertain and depends on the exchange rate and the global economy.

"The rise in the yuan is unlikely to be sustainable," Liu said. The yuan eased 0.04 per cent yesterday from Thursday and closed at 6.2356 per US dollar after the central bank set a weaker reference rate.

QE3 is also unlikely to contribute to the net capital inflows into China, Liu said.

"For the hot money, [investing in] China is not as attractive as before," he said.

Li said the US "fiscal cliff" is clouding the outlook for the global economy and may drive capital out of the mainland.

"If the global economy deteriorates, the hot money needs to find a safe shelter," he said.

Li said the yuan exchange rate would remain stable, bolstered by China's three trillion yuan in foreign exchange reserves even if there are huge capital outflows.