Chinese Banks' Forex Sales May Indicate Capital Outflows

China’s central bank and commercial lenders sold more foreign currency than they bought for the first month this year in April, indicating capital may have flowed out of the world’s second-biggest economy.

Chinese banks sold a net 60.6 billion yuan ($9.59 billion) of foreign currency in April, according to calculations based on preliminary data released by the People’s Bank of China yesterday. That compares with 124.6 billion yuan of net purchases in March.

The government has stalled gains in the yuan against the dollar this year, allowing the currency to weaken 0.2 percent against the dollar in April. The central bank on May 12 cut banks’ reserve requirements for the third time in six months to pump money into the financial system after industrial-production and lending data showed the economy slowing in April.

“Definitely, it’s a capital outflow,” said Cliff Tan, East Asian head of global currency research at Bank of Tokyo- Mitsubishi UFJ Ltd. in Hong Kong. The government may “work on some structural policy changes that would encourage capital inflows, like allowing foreign pension funds to invest in China and more central banks to buy Chinese debt,” he said, calling the April flows “capital seepage.”

The nation posted a larger-than-forecast trade surplus of $18.4 billion in April. Foreign direct investment in the month declined 0.7 percent from a year earlier to $8.4 billion, the Commerce Ministry said yesterday, the sixth straight monthly decline.

Cooling Growth

Chinese banks had three straight monthly net sales of foreign currency in the fourth quarter of 2011 as economic growth cooled. The economy expanded 8.1 percent in the first three months of 2012 from a year earlier, the fifth quarterly deceleration, as Premier Wen Jiabao’s campaign to curb property prices damped domestic demand and Europe’s debt crisis limited exports.

Yuan positions at financial institutions accumulated from foreign-exchange purchases stood at 25.5 trillion yuan at the end of April, according to the data yesterday. That’s up 1.57 trillion yuan from a year earlier.

China’s government, through the central bank, intervenes in currency markets to keep the yuan from appreciating too much when capital flows into the country.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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