China’s First-Quarter Capital-Financial Account Surplus Surges
The $101.8 billion figure was the biggest since the three months ending December 2010 and compared with $56.1 billion in the same period last year, according to preliminary data released on the State Administration of Foreign Exchange website today. The capital and financial account returned to a surplus of $20 billion in the fourth quarter of 2012, reversing two quarters of deficits.
Capital inflows are being driven by speculation that the People’s Bank of China will tolerate more yuan appreciation and by quantitative easing in Europe, the U.S. and Japan that’s spurring investors to seek higher returns. The currency climbed to a 19-year high today as the central bank set a record reference rate.
“This is driven by a more stable global economy that has increased investors’ risk appetite as well as prospects for yuan appreciation and a sizeable interest-rate spread,” said Ding Shuang, a Hong Kong-based economist with Citigroup Inc. “Inflows may continue if the current pace of economic growth can be sustained although renewed tension in the global economy such as a debt crisis in a major economy in the euro zone will likely shift the direction.”
The yuan, also known as the renminbi, climbed 0.12 percent to close at 6.1707 per dollar in Shanghai today, according to the China Foreign Exchange Trade System. It touched 6.1694 earlier, the strongest level since the government unified the official and market exchange rates at the end of 1993. The currency, which is allowed to diverge from the daily fixing by a maximum 1 percent, was at a 0.96 percent premium to the PBOC reference rate today.
The central bank “spent the first quarter fighting the inflows, accumulating $157 billion of foreign exchange along the way,” said Wang Qinwei, a London-based economist at Capital Economics who previously worked at the PBOC. “Policy makers have tolerated a resumption of renminbi gains against the dollar this month but market pressures are for much more rapid movement which implies that intervention is continuing.”
China’s central bank and financial institutions bought a record net 683.7 billion yuan ($111 billion) of foreign currency from customers in January, as companies and individuals offloaded dollars to buy yuan in expectation of appreciation. They bought 295.4 billion yuan in February and 236.3 billion yuan in March, according to PBOC data.
Yi Gang, People’s Bank of China deputy governor, said on April 17 in Washington that the yuan’s trading band will be widened “in the near future” as the exchange rate becomes “more market-oriented,” spurring gains in the currency. The last revision, which doubled the band to 1 percent, was announced on April 14, 2012.
“Massive capital inflows will continue due to higher interest-rate spreads between China and all major economies as well as renewed yuan appreciation expectations,” said Shen Jianguang, chief Asia economist with Mizuho Securities Asia Ltd. in Hong Kong.
China last year had the biggest deficit in its financial and capital account since records began in 1982 as the domestic and global economies slowed. The $117.3 billion annual gap was the first since 1998 when investors deserted China during the Asian financial crisis.
“Much of the apparent net financial outflow in 2012 was temporary, related to expectations of yuan depreciation against the dollar at that time,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. The resumption of inflows will persist “in coming months as China’s economic outlook remains strong compared to that of most other countries.”
The capital and financial account includes flows of funds for mergers and acquisitions, foreign direct investment, purchases and sales of equities and fixed-income securities and the central bank’s reserve account used to buy and sell foreign currencies.
China’s surplus in the current account, the broadest measure of trade, was $55.2 billion in the first quarter, according to today’s SAFE statement.
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