Outflow of capital less than feared, analysts say

By Wang Xiaotian ( China Daily ) Updated: 2012-12-28 07:39:51

China's capital and financial account deficit in the third quarter was revised down to $51.7 billion from the previous figure of $71 billion, the State Administration of Foreign Exchange said on Wednesday.

The net inflow of foreign direct investment was $38.5 billion. Excluding the effect of fluctuations in exchange rates and asset prices, the country's international reserve assets declined by $400 million in the third quarter, the administration said in a statement.

Although the capital and financial deficit was revised downwards, it remains higher than the second-quarter figure of $41.2 billion, suggesting a larger amount of capital outflows than three months earlier.

The revised figure eased concerns that an excessive amount of capital is flowing out of the country - capital that is needed to support an economic rebound.

Such concerns intensified after Chinese financial institutions' yuan holdings for purchasing foreign exchange, an indicator of capital flows, declined by 73.6 billion yuan ($11.8 billion) in November.

Some analysts said they believed that the decline, which ended two consecutive months of growth, may indicate that $40 billion of capital left the country.

Guo Huiming, an analyst at the National Association of Financial Market Institutional Investors, said the drop doesn't necessarily mean a large outflow of "hot money", as it resulted from a time lag between capital flows and actual trade activity.

"In addition, the FDI figure from the Ministry of Commerce only contains primary investment capital, excluding capital flows between companies and reinvestment with profits."

Data from the administration suggested there is no need to worry about capital outflows, and last month's surprising decline in yuan holdings may be the result of certain transactions conducted between the central bank and financial institutions, said Zhao Qingming, a senior analyst at China Construction Bank Corp.

Chinese banks bought a net $18.5 billion in foreign exchange from their clients in November, the administration announced on Monday, indicating capital inflows instead of outflows.

As long as China's economic growth remains stable, the trend of capital inflows won't be reversed, said Zhao Xijun, deputy dean of the school of finance at Renmin University of China.

Qiu Gaoqin, a senior financial analyst at Bank of Communications Ltd, said: "Yuan holdings for foreign exchange purchases showed greater volatility this year. We believe in 2013 the holdings will increase to a greater extent than this year, as the yuan fluctuates to a small extent in both directions."

Peng Xingyun, a senior financial researcher at the Chinese Academy of Social Sciences, said China's slower economic growth and reduced expectations of yuan appreciation will lead to individuals and enterprises holding more foreign exchange and generate more cross-border capital outflows.

"As a result, the central bank will be more willing to use foreign exchange reserves to intervene in the foreign exchange market, which will result in the slower growth of foreign reserves. Maybe we will see some declines in foreign reserves in 2013," said Peng.

China's total foreign debt fell to $770.8 billion at the end of September from $785.2 billion at the end of June, the administration said on Thursday.

Short-term debt, a gauge of hot money inflows, dropped to $572.8 billion at the end of September from $588.2 billion at the end of June, it said.

The administration also adjusted the third-quarter current account surplus to $70.8 billion from the previous figure of $70.6 billion.

Commodity trade registered a surplus of $102.9 billion, while service trade saw a deficit of $29.7 billion.

China's current account surplus amounted to $148 billion in the first nine months of 2012, while its capital and financial account deficit stood at $36.8 billion.

Louis Kuijs, chief China economist at the Royal Bank of Scotland Group, forecast a rise in the current account surplus to 3.6 percent of GDP in 2012 and 3.9 percent of GDP in 2013.

"Since we believe real economy considerations remain paramount in the setting of financial policies, we expect the pressures to lead to continued heavy management of the exchange rate," he said.

(China Daily 12/28/2012 page14)

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