China's net foreign exchange selling at $38.9 billion in July, indicating big outflows

BEIJING: China's central bank and commercial banks sold a net $38.9 billion in foreign exchange in July, the biggest sales on record, official data showed, indicating big capital outflows as well as suspected intervention to prop up the exchange rate.

Any intervention may have slowed in August after a surprise devaluation, but economists warn that the weaker currency may encourage more capital flight.

On Tuesday, the People's Bank of China shocked markets by devaluing the yuan by nearly 2 per cent, a move it billed as a reform step but which some suspect could herald further currency weakness to spur exports.

 The yuan held steady against the dollar on Friday after suspected intervention by the central bank to get the volatile market to settle into a range and to curb expectations the currency would fall into a depreciation cycle.

 Net foreign exchange selling amounted to 249.1 billion yuan in July, according to Reuters calculations based on central bank data released on Friday. That selling was the biggest since 1998 when central bank data first became available. It followed net sales of 93.7 billion yuan in June.

 Concern over China's economic slowdown and possible interest rate rises by the U.S. Federal Reserve had led to a wave of capital outflows, although Chinese officials said that should not be considered capital flight.

 Haibin Zhu, China economist at JPMorgan, estimated capital outflows totalled $340 billion in the year spanning the third quarter of 2014 to the second quarter of 2015. "The magnitude and the duration of capital outflows are unseen in China," he said in a recent research report.

 Recent outflows have put pressure on the central bank to cut banks' reserve requirements to spur credit growth at a time when economic growth in 2015 is grinding towards a 25-year low.

 "We may still see net foreign exchange selling in August as the yuan is depreciating and the central bank has clearly stepped in the market," said Lin Hu, an economist at Guosen Securities in Beijing.

 "The possibility of cutting reserve requirement ratios is very high."

 The PBOC has cut interest rates four times since November to support the economy, on top of two system-wide reserve requirement cuts, and most analysts expect it to loosen policy further.

indiatimes.com