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China Bank Data Point to Capital Outflows in January--Update

02/17/2015 | 12:02am US/Eastern
By William Kazer 

Despite a record trade surplus and a steady inflow of investment capital, China's banks posted net sales of foreign exchange in January, suggesting that capital was flowing out of the country during the month.

Analysts said the foreign-exchange data, released Tuesday by the central bank, partly reflected declining confidence in the nation's currency amid a slowdown in the economy, as exporters and individuals held on to foreign exchange rather than convert it into yuan.

They also said it was yet another signal the People's Bank of China would need to offset the loss of those funds by reducing the percentage of deposits that banks must park with the central bank in case of financial trouble.

Banks and the central bank recorded net sales of 108.3 billion yuan ($17.33 billion), slightly less than the 118.4 billion yuan recorded in December, according to central bank data.

"This is partly due to capital outflows," said Xie Dongming, an economist at OCBC in Singapore.

"Foreign direct investment and the trade surplus were both very strong in January," he said, suggesting that such high inflows should set the stage for net purchases.

China posted a record $60 billion trade surplus in January, up from a $49.6 billion surplus in December, while foreign direct investment came in at $13.92 billion in January, up 29.4% from a year earlier and slightly better than December's $13.32 billion.

Although the foreign-exchange data also include figures from commercial banks and other financial institutions, they mostly reflect purchases and sales by the central bank. The figure is seen as a rough guide to changes in domestic liquidity conditions.

The yuan's weakness against the U.S. dollar of late has made many companies and individuals reluctant to convert their foreign funds into local currency. The yuan lost 2.5% against the increasingly robust U.S. dollar last year and another 0.8% this year.

The yuan's losses came as growth of the world's second biggest economy slowed from double-digit levels in recent years to 7.4% in 2014--the weakest pace in nearly a quarter of a century.

Banks have seen rising levels of foreign-currency deposits, and that is a sign that exporters and individuals are "not confident in the outlook for their own currency and don't want to hold on to it," said Dariusz Kowalczyk, an economist at Crédit Agricole in Hong Kong. He said he sees this as the key factor in the net foreign-exchange sales data.

Mr. Kowalczyk said the market is looking for the yuan to fall further to 6.35 or 6.40 to the U.S. dollar from the 6.25 level it traded at Tuesday morning.

Analysts said the central bank would need to lower the reserve-requirement ratio for banks to boost liquidity in the banking system. Big banks currently have to keep 19.5% of their deposits with the central bank, but a reduction of that rate would free up funds for borrowers and in turn help stimulate economic growth.

Earlier this month, the central bank cut its reserve requirement by half a percentage point, freeing up an estimated 500 billion yuan for banks to lend. It also made other targeted adjustments in the reserve ratio aimed at boosting lending to smaller businesses and agriculture, freeing up another 160 billion yuan. It was the first across-the-board cut in the reserve requirement since May 2012.

Write to William Kazer at william.kazer@wsj.com

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