China’s Central Bank Reduces Forex Sales as Capital Outflows Slow Down

Sale of foreign exchange by the People’s Bank of China was the lowest point in five months in January this year, indicating that capital outflows have reduced. China’s central bank has aggressively pursued a policy of scrutinising cross-border transactions. Furthermore, the steadying of the yuan has also reduced the outflow of capital.

The People’s Bank of China reported net foreign exchange sales of 208.8 billion yuan (the equivalent of US$30.4 billion) in the month of January. In comparison, the figure for December 2016 was 317.8 billion yuan. Incidentally, the central bank sold 644.54 billion yuan a year ago in January 2016.

According to data released by the State Administration of Foreign Exchange (SAFE), commercial banks sold US$19.2 billion worth of foreign currencies, a three-month low. In comparison, they sold US$46.3 billion in the month of December 2016. SAFE also echoed the country’s central bank saying that cross-border flows of currency had become more balanced and that there was reduced pressure from capital outflows.

China’s devaluation of the Yuan in August 2016 came as a big surprise and it had resulted in massive capital outflows. The situation has also been exacerbated by worries of the Chinese economy slowing down. The country’s central bank has been bolstering the currency by parting with its immense foreign exchange reserves at a breakneck pace since this was the most effective way to deal with capital outflows.

There was a massive month-on-month 28% slide in forex buying for overseas travel and study during January even though this is China’s main travel season. This very likely indicates that stricter reporting requirements were causing individuals to defer their forex purchases. Chinese citizens are permitted to buy US$50,000 worth of foreign currency every year. However, starting January 1, individuals are required to state how exactly plan to spend the foreign currency they purchase and in many cases they have to provide the supporting documentation. The rule has been instituted to prevent the illegal use of foreign currencies, the most common one being the purchase of real estate abroad.

China has maintained forex reserves in excess of US$3 trillion for almost six years, but January saw the reserves dropping below this level. This indicates that the flight of capital has slowed down. The dollar’s pressure on the yuan was relieved somewhat when the greenback recently slowed its upward movement. In fact, other emerging-market currencies have also benefited from the dollar’s stumble. The yuan has risen 1.2% vis-à-vis the US dollar in 2017, a welcome reversal after its 6.6% drop in 2016.

Industry analysts are of the opinion that the Chinese currency will face further pressure in the months to come, given that there are plenty of indications that the US Federal Reserve will increase interest rates at least two or three times in 2017 as part of its efforts to strengthen the greenback.

Tim Condon, ING’s Singapore-based Head of Asia Research, pointed out that the PBOC’s January data on foreign exchange sales indicated a substantial drop in onshore dollar purchases during that month. Even so, he said that the value of the Yuan depended heavily on the dollar and that the likely dollar appreciation would lead to a period of uncertainty.

There was also a 35.7% drop in outbound direct investment originating in China year-on-year for the month of January.

Chinese government officials and have sought to allay fears about the massive capital outflows, saying that a big part of them was caused by local firms servicing foreign debt. They also pointed out that many Chinese companies were choosing to invest money abroad. Whatever be the reason for the outflows, China will no doubt continue to have a huge impact on the world economy.