Foreign Exchange Market

Net money inflow takes heat off China's central bank

The extra liquidity means the PBOC need not lower the reserve ratio for mainland lenders

PUBLISHED : Wednesday, 24 October, 2012, 12:00am
UPDATED : Wednesday, 24 October, 2012, 4:07am

The surge of foreign exchange into the mainland last month is expected to ease pressure for monetary loosening in the near term.

But the influx is unlikely to persist, given the gloomy trade outlook and lack of appreciation in the yuan, analysts say.

Mainland banks bought a net 130.7 billion yuan (HK$162 billion) of foreign exchange last month, snapping two straight months of net sales and easing pressure in the near term for a cut in the reserve requirement ratio.

Outstanding yuan positions at financial institutions accumulated from foreign exchange purchases rose to 25.77 trillion yuan at the end of last month, data released by the People's Bank of China (PBOC) on Friday showed.

The jump of 130.7 billion yuan compares with decreases of 17.4 billion yuan in August and 3.82 billion yuan in July. The resulting increase in market liquidity makes it less urgent for the PBOC, the mainland's central bank, to lower the proportion of deposits commercial banks must set aside as reserves.

Peng Wensheng, an economist at China International Capital Corp, said: "The necessity for lowering the reserve ratio is decreasing for now."

Economists predicted before the release of the data that the central bank might cut the reserve ratio again this year after three reductions since November, increasing the funds banks can lend to counter the economic slowdown.

Gross domestic product expanded 7.4 per cent in the third quarter, the slowest in 14 quarters, but last month's indicators showed some improvement.

Among them, exports rose 9.9 per cent from a year ago, sharply up from the 2.7 per cent gain in August and outpacing imports, generating a trade surplus of US$27.7 billion last month, a 44-month high.

The surplus totalled US$80 billion for the quarter.

Analysts said the jump in foreign exchange amassed in mainland banks was due to the widened trade surplus and potential hot money inflows after the US Federal Reserve announced a third round of quantitative easing, or QE3, as well as the recent appreciation of the yuan.

"Hot money outflows from China fell to US$54 billion in the third quarter from US$166 billion in the second quarter," Barclays Capital economists said in a research note.

"While these data are only available quarterly, it is reasonable to assume that outflows may have fallen in [the] early [part of the] third quarter and may even have turned to inflows last month as market expectations of the QE3 started to build."

The yuan's nominal effective exchange rate has appreciated more than 1 per cent since mid-September.

The spot rate against the US dollar has hit historic highs in the past couple of weeks, owing to the trade surplus and China's intentions to "head off US criticism ahead of the November 6 presidential election", the Barclays economists said.

Industrial Bank economist Lu Zhengwei said substantial appreciation of the yuan would not take place.

"The foreign exchange increase will not become a trend," Lu said, explaining that the trade outlook is surrounded by uncertainty and that policymakers will not allow a substantial advance of the currency, which would exacerbate exporter's difficulties.