China C.Bank Official Plays Down FX Inflow Worries |
By Lu Jianxin and Jason Subler
SHANGHAI, Nov 29 (Reuters) - A set of data published by the People's Bank of China shows capital inflows jumped in October, reinforcing the government's rationale for a slew of recent monetary tightening steps.
The central bank and Chinese institutions spent 519 billion yuan ($78 billion) to absorb foreign exchange flowing into China last month, according to Reuters calculations based on the latest "Position for Forex Purchases" data published over the weekend.
That was about double the totals of 290 billion yuan in September and 243 billion yuan in August.
October's "Position for Forex Purchases", a key measure reflecting capital inflows into China, was the third largest since the PBOC started to publish the data in the late 1990s,
It was just shy of a record 654 billion yuan hit in January 2008 and 525 billion in April 2008, Reuters calculations showed.
But deputy PBOC governor Ma Delun played down assumptions that the data would translate into another surge in China's official foreign exchange reserves.
"We cannot get the figure for foreign exchange reserves by simply using the foreign exchange purchase position and dividing it by the exchange rate," Ma told a media briefing on Monday, according to the news portal Netease.
That is because foreign exchange is bought at different times at different exchange rates, Ma explained. The PBOC did not invite foreign media to his briefing.
Ma said the central bank had already sterilised the yuan liquidity injected as a result of its foreign exchange purchases by issuing central bank bills.
YUAN EFFECT
China has seen a steady increase of capital inflows in the past decade as speculators have bet on rising share and property prices as well as an appreciation of the yuan.
The yuan rose 0.31 percent against the dollar in October after gaining 1.74 percent in September, its biggest monthly gain since its landmark revaluation in July 2005, as pressure mounted for the currency to climb, particularly from the United States.
Share prices jumped 14 percent in October, while property prices remained stable despite a series of official cooling measures as China's money market was flooded with liquidity.
The ample liquidity was partly the result of Chinese institutions dumping cash in anticipation of a fresh leg of quantitative easing by the Federal Reserve, traders said.
While the market was still in the dark about how much money was flowing into China around the time of the U.S. central bank's announcement of a second round of asset purchases, the PBOC sprang a surprise by raising interest rates on Oct. 19.
Although the U.S. easing steps do not begin until next month, traders said the inflows were from institutions anticipating more liquidity becoming available after QE2 kicks in.
The PBOC followed through with an official rate rise and on several occasions raised the amounts banks must put in reserve with the central bank, locking up about 1 trillion yuan.
Ma said the tightening steps were aimed at braking excessively fast money supply growth and rising prices. The moves were "conducive to guiding public and market expectations", Xinhua quoted him as saying.
Funding costs in China have jumped since then, with the PBOC's tightening steps making banks cautious about lending, leading to a tentative squeeze in the money market.
Last week, the PBOC injected 54 billion yuan into the system via its open market operations and is expected to do so again this week as the liquidity situation worsens sharply.
As such, traders said, a widely expected second rise in official lending and deposit rates this year may now be unlikely, and could be delayed until the first quarter of next year.
About the author: Reuters
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