China’s capital flows are stabilizing

Nail biting over slower Chinese GDP growth and antsyness about the longevity of the stock rally in Shanghai abounds. But naysayers often overlook pockets of obvious strength in China’s economy.

Bloomberg reports that Chinese banks turned net buyers of foreign exchange on behalf of their clients in May for the first time in nine months, in a signal that capital flows are stabilizing.

Lenders bought 24.5 billion yuan ($3.95 billion) more overseas currencies than they sold in April, the State Administration of Foreign Exchange said in a statement on Thursday.  What’s more, a net $20 billion of capital flowed into China in the first five months of the year, according to a SAFE official  at a Wednesday briefing in Beijing.

China’s banks also bought foreign currency worth 840.7 billion yuan for clients in May and sold 816.1 billion yuan, SAFE data show.

All this reflects the fact that regulators have stopped the yuan from slipping sharply vs. the dollar to curb outflows and support the Beijing’s bid to have the Chinese currency included in the IMF’s Special Drawing Rights basket. The yuan has fallen less than 0.1% in Shanghai’s onshore market in 2015, while the dollar has advanced 3.1% against its major peers.

“The pressure on capital outflows has been reduced because investors are more willing to hold the yuan as it’s been stable,” said Liu Xuezhi, a Shanghai-based analyst at Bank of Communications Co. told Bloomberg. “There are signs China’s economy has bottomed out, which helps prevent capital leakage.”

Also curbing outflows was the central bank’s move to reduce the cash reserves that lenders must have on hand and three benchmark interest rate cuts since November.

 



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