Dip in yuan funds for foreign exchange

China's yuan funds outstanding for foreign exchange fell to 25.66 trillion yuan (4.07 trillion U.S. dollars) at the end of July, down nearly 3.82 billion yuan month on month, the central bank said on Tuesday.

The fall was a result of the country's shrinking foreign trade and foreign direct investment amid global economic woes, according to a statement on the website of the People's Bank of China.

The nation's trade surplus stood at 25.15 billion U.S. dollars in July, far less than market expectations of 34.3 billion. Export growth edged up 1 percent in July from one year earlier, but fell 1.8 percent month on month.

The country's foreign direct investment fell to a six-month low of 59.1 billion U.S. dollars in June.

The dip in yuan funds outstanding for foreign exchange is also a strong indication of speculative capital flowing out of the country amid the sovereign debt crisis in Europe, the economic slowdown in the United States and rising expectation of a weaker yuan, analysts said.

The yuan, China's currency, has depreciated 1.93 percent since the start of 2012.

China's slowing economy has raised concerns over its growth prospects, and has to some extent accelerated the exodus of foreign capital from the world's second-largest economy.

The country's gross domestic product grew by 7.6 percent year on year in the second quarter of 2012, the slowest pace in almost three years.

Lian Ping, chief economist for the Bank of Communications, said the nation's yuan funds outstanding for foreign exchange will dive to around 1 trillion yuan in 2012, down from 2.78 trillion yuan last year.

Market liquidity is influenced by the amount of yuan funds outstanding for foreign exchange, which in turn decides the amount of yuan funds that the central bank had to inject to offset the same amount of foreign exchange inflow from trade surplus and overseas speculative money, as yuan remained inconvertible under the capital account.

The fall in July triggered worries over tighter liquidity and strengthened expectations of further cuts in reserve requirement ratios.

The country's slowing inflation has provided room for policymakers to further ease monetary policies, according to analysts.

Lian predicted the nation will cut reserve requirement ratios one to three times more during the rest of the year, each by 50 basis points, in order to pump more liquidity into the market and achieve the 14-percent money supply growth target set for this year.