Capital flows moving in line with goals of policymakers

Changes to weaken expectations of yuan appreciation, SAFE says

BEIJING - China didn't experience large capital outflows in recent months, although the pace of net inflows slowed, which was in line with policymakers' aims, the nation's foreign-exchange authority said.

"The recent changes in foreign capital flows can help achieve a balance of international payments and weaken expectations of yuan appreciation", which did more good than harm for the economy, said the State Administration of Foreign Exchange (SAFE) on the website of people.com.cn.

"We will crack down on any illegal foreign exchange transactions, including illicit cross-border capital transfers and underground banks' trades, to limit financial systematic risks," SAFE said.

According to the People's Bank of China (PBOC), the central bank, the decrease of its yuan positions for foreign-exchange purchases accelerated in December, showing a drop of 15.8 billion yuan ($2.5 billion) from November.

The figure has contracted each month since October, though the decline in that month was only 3.17 billion yuan. The change indicated a faster pace of capital outflows, economists said.

The PBOC might release the January data this week.

Peng Wensheng, chief economist at China International Capital Corp, forecast that the growth of the yuan counterpart of foreign exchange reserves might "sharply decrease" this year compared with 2011, because of weak exports to Europe.

"It may drive the PBOC to cut commercial banks' required reserve ratio and allow more lending to increase market liquidity," Peng said.

The slowdown of foreign capital inflows in the past few months had eased some pressure for yuan appreciation, but the situation would only prevail in the short term, analysts said.

"The yuan exchange rate against the dollar is likely to rise by as much as 4 percent in 2012", though there might be some brief periods of depreciation, a report from JP Morgan said.

The yuan appreciated by 5.11 percent against the dollar last year, according to SAFE.

SAFE urged small exporters to choose suitable financial instruments in banks, including options and swaps, to hedge exchange risks as global economic growth slowed.

The deepening European debt crisis and the weak recovery of developed economies have brought difficulties for China's foreign-exchange management, and "our primary task is to control risks", SAFE said.

As of the end of 2011, the country's foreign exchange reserves had declined to $3.18 trillion from $3.2 trillion at the end of the third quarter, the first quarterly decline in more than a decade, official data showed.

China Daily