Forex funds complicate monetary policies

Updated: 2011-09-22 10:02


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BEIJING - Rapid growth in outstanding yuan-denominated foreign exchange funds is becoming a problem for monetary authorities in their attempts to create policies that can serve both economic growth and inflation control.

The People's Bank of China (PBOC), the country's central bank, on Sept 21 said that increased yuan-denominated funds stemming from foreign exchanges rose to a five-month high of 376.94 billion yuan ($59.1 billion) in August.

The figure represented a sharp rise of 72 percent month-on-month. As of the end of August, the nation's total yuan-denominated funds outstanding for foreign exchanges stood at 25.26 trillion yuan.

Analysts say the increasing funds have triggered an alarm, warning authorities about a massive influx of speculative foreign capital. China has become a hot spot for global speculators seeking profits in recent years, leading the government to boost its efforts to crack down on the influx of "hot money."

A trade surplus, foreign direct investment (FDI) and foreign capital are three major sources of yuan-denominated funds outstanding for foreign exchanges in China.

Government figures released earlier this month showed that the trade surplus stood at $17.76 billion in August, while FDI reached $8.45 billion.

Analysts say global liquidity flowed out of developed economies to newly emerging economies in August amid the European and US debt crises and turmoil in the financial markets of developed countries.

E Yongjian, a financial researcher from the Bank of Communications, said the surging funds are a sign that the flow of global liquidity is becoming more complicated. The increasing funds have created more pressure on China to control inflation. The consumer price index, a major gauge of inflation, rose 6.2 percent last month, well above the government's 4-percent target for the full year.

To lock up more liquidity in the market and contain inflation, the central bank its raised reserve requirement ratio (RRR) six times for banks in the first half of this year.

PBOC deputy governor Hu Xiaolian said that hiking the bank's RRR played an important role in offsetting new liquidity stemming from foreign exchange influxes.

However, E Yongjian said the central bank may not continue to hike the ratio, as the tight monetary policies that are currently in place are already making it more difficult for small- and mid-sized companies to borrow from banks. Analysts expect the central bank to resort to open market operations to regulate the monetary market.