BIS expects more China bank capital outflows

Chinese banks saw net capital outflows of US$109 billion in the first quarter of this year and weak incentives to hold renmimbi positions indicate capital may keep trickling out, a BIS report said yesterday.

In its quarterly review, the Bank for International Settlements said that international banking statistics showed the money had flowed from banks inside China to overseas banks, putting downward pressure on the currency. "These results offer clues as to what may happen in the third quarter, during which China changed its exchange rate policy," BIS said

China devalued the yuan on August 11 and has been spending heavily to hold the currency steady onshore as fears have grown that the economy is in worse shape than previously thought.

Central bank reserves declined by a US$94 billion in August and authorities this week instructed banks to bolster management of foreign exchange transactions and pay attention to suspicious transactions.

BIS said pressure on the yuan had been building since the first quarter as a cut in deposit rates and a slight depreciation in mid-March reduced incentives to hold the local currency.

Yuan-denominated deposits held by the rest of the world at Chinese banks fell, amounting to a net outflow of almost US$109 billion, the report added.