China Economy

Mainland forex regulator warns of big swings in capital flows

Foreign exchange regulator says sharp changes in speculative capital movements may undermine the country's economic recovery

PUBLISHED : Friday, 25 January, 2013, 3:29pm
UPDATED : Monday, 30 May, 2016, 5:01pm

The mainland should be prepared for big swings in speculative capital flows amid global economic uncertainties, the country's foreign exchange regulator said yesterday.

The State Administration of Foreign Exchange said the country could face pressure from large-scale hot money inflows as the economy got back on track and major economies persisted with loose monetary policies and low interest rates to fuel recovery.

The risk elements brought about by large capital outflows could not be ignored as the nation's recovery was not yet complete, the regulator said. "We should actively prevent big swings in either direction."

Net capital outflows in the first three quarters of last year exacerbated the mainland's economic slowdown while fears of inflation were sparked as inflows recovered in the fourth quarter.

Foreign exchange reserves increased by US$128.9 billion last year, the smallest rise since 2004. Trade surplus and net foreign direct investment together amounted to US$265.6 billion, pointing to substantial capital outflow last year.

Expectations of greater trade surplus, positive net foreign direct investment and "a likely drop in capital outflows" should "keep pressure on the yuan to appreciate" this year, said Igor Arsenin, an analyst at Barclays Capital.

Last year, banks bought US$1.57 trillion in foreign currencies and sold US$1.46 trillion, SAFE said.

The US$110.6 billion net purchase was 58 per cent lower than the trade surplus and net foreign direct investment combined because the yuan was expected to depreciate in the first three quarters of last year, the regulator said.

"The [yuan] is now relatively strong, to some extent reflecting expectations of appreciation," it said.

Robert Minikin, an analyst at Standard Chartered, said the yuan would trade at 6.10 to the US dollar domestically by the end of this year, a net appreciation of 2.1 per cent. Offshore, it would strengthen 2.3 per cent to 6.08 per dollar.

"The export-led trade improvement is expected to extend into this year, which is supportive of renewed yuan appreciation," Minikin said.

However, a substantial appreciation was unlikely as President Barack Obama's re-election and the sustained US economic recovery suggested little reason for an early re-emergence of international pressure to speed up yuan gains, he said.

The People's Bank of China yesterday set the daily yuan exchange-rate fixing at 6.2805, the lowest level since January 9, spurring speculation that Beijing is aiming to cap gains as a slide in the yen makes Japanese exports more competitive.

The yuan gained about 1 per cent against the dollar last year.