China Says Payments More Balanced as Inflows, Reserves Fall

China’s capital inflows fell in the first quarter, leading to a smaller increase in foreign reserves as the government allows greater currency flexibility to seek more balanced international payments.

Net inflows under the capital account dropped by 56 percent from a year earlier to $49.9 billion, the State Administration of Foreign Exchange said in a statement on its website today. The trade surplus also narrowed 14 percent to $24.7 billion, showing that cross-border fund flows are “more balanced,” the agency said.

China this month widened the yuan’s trading band against the dollar for the first time since 2007, a move that may let market forces play a bigger role in fixing the currency’s value and will help balance payments and slow the accumulation of foreign-exchange reserves, SAFE said today. The nation’s holdings, the world’s largest, fell in March from February in the first monthly decline since the end of last year, central bank data released April 24 showed.

A $123.8 billion increase in the reserves for the first quarter doesn’t indicate the nation is again facing large capital inflows, because the figure included asset-price and exchange-rate changes, SAFE said. Reserves, excluding those influences but including investment gains, grew by $74.8 billion quarter, 46 percent less than the increase a year earlier, according to the statement.

Inflows under the capital account, which includes mostly foreign direct investment and securities holdings, reversed from a $48.1 billion outflow in the previous quarter, after money returned to emerging markets as investors sought higher returns amid an improved global environment, SAFE said. The risk of large cross-border fund flows has increased with the European debt crisis continuing, the agency added.

Fluctuations in the yuan’s exchange rate have been “steady” and expectations for future movements are “stable” since the trading band was widened this month, the agency said.

To contact Bloomberg News staff for this story: Bloomberg News in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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