SAFE denies intense capital outflow

Banks approved for foreign exchange (forex) transactions sold more foreign currencies than they bought last month, although regulatory authorities have denied that foreign capital has been massively withdrawn from the country.

July marked the second month this year that a deficit in forex transactions has been recorded, indicative of a net capital outflow for the month, according to the State Administration of Foreign Exchange (SAFE).

Banks purchased forex worth $150.8 billion last month while selling a total of $157.6 billion, creating a deficit of nearly $7 billion, data from the administration showed.

Foreign exchange transactions are a major cause of fluctuations in China's foreign exchange reserves. July's deficit indicates a continued outflow of foreign capital since June.

The deficit in June stood at $400 million.

"Both internal and external factors have led to a slowdown in capital inflows to China, as well as net capital outflow," said Zhao Qingming, a finance expert at China Construction Bank.

Zhao said expectations for the appreciation of the Chinese currency have weakened since May alongside a slowing economy.

China's economy has been recovering slowly, easing to 7.5-percent growth in the second quarter from 7.7 percent in the first three months and 7.9 percent in the final quarter of 2012.

Zhao said more rapid economic recovery in the United States and the US central bank's intention to scale back its massive bond-buying program later this year have also led to the currency depreciations and stock market declines in emerging economies.

However, SAFE denied that foreign capital is rapidly flowing out of the country. It also predicted that cross-border capital flows will tend to stabilize despite small-scale fluctuations in the remainder of the year.

In the January-July period, forex purchases stood at $1.06 trillion, with sales of $930.6 billion, representing a surplus of $131.5 billion.

Foreign capital flowed into China in massive volume from October 2012 to April 2013 amid ample global liquidity and heightened expectations for the yuan's appreciation.

During the January-April period, banks registered a monthly average surplus of $32.1 billion in their forex transactions.

However, forex inflows have been slowing since May, when Chinese regulatory authorities increased supervision over capital flows, including stricter checks on mismatches between cargo and cash, to crack down on speculation.

Analysts said there is no need to worry about the short-term outflow of foreign capital and its impact, as Chinese authorities faced the same problem last year and successfully overcame its impact.

Zhang Ming, an international investment researcher with the Chinese Academy of Social Sciences, said the central government will likely resort to open market operations to meet the market demand for liquidity.

"If the short-term foreign capital outflow expands and the economy slides beyond expectations, we cannot exclude the possibility of a cut in the reserve requirement ratio for banks," Zhang said.