Capital outflow risks 'manageable'

Investors inclined to sell yuan as US Federal Reserve ends quantitative easing policy

China is facing growing pressure of capital outflows, but such risks are manageable as the country is likely to post a current account surplus this year, the nation's foreign exchange regulator said on Thursday.

The country recorded a deficit of $46.5 billion in foreign exchange settlement by Chinese banks in the fourth quarter, nearly tripling the amount of $16 billion in the third quarter, the State Administration of Foreign Exchange said.

This underscored the risk of capital outflows in China as companies and investors have become more inclined to sell the yuan on expectations of a stronger dollar after the US Federal Reserve ended the quantitative easing policy.

Guan Tao, head of the SAFE's department of international payments, said China has been affected by the Fed's move as the yuan has been facing depreciation pressure, but the regulator is capable of maintaining a stable foreign exchange market as the liquidity position is more than ample.

"China will maintain a relatively fast economic growth rate and the interest rate of the yuan is still higher than that of other major currencies, which allows the country to maintain its attractiveness to international capital in the mid-and long-term," he said.

Chinese banks still managed to see net foreign exchange inflows of $125.8 billion last year, according to the SAFE.

Guan said that China will continue to see a surplus under the current account while having greater two-way fluctuations under the capital account.

Last year, China's foreign exchange reserves declined for the first time in the past two years. By the end of the third quarter of the year, the amount stood at $3.89 trillion, dropping $100 billion from the previous quarter.

Guan said the capital outflows and a wider trading range for the yuan are in line with the regulator's target to achieve an international balance of payments and to gradually exit from government intervention in the foreign exchange market.

The US is expected to raise interest rates later this year while Europe and Japan may step up quantitative easing policies.

Economists said the divergence of monetary policy among major advanced economies may further complicate China's foreign exchange management and might trigger competitive currency devaluation in emerging markets.

Researchers at US investment bank Goldman Sachs Group Inc said in a research note that the recent capital outflows may prompt the Chinese central bank to sell the dollar to stabilize the yuan value.

Most analysts have forecast that sharp depreciation of the yuan is unlikely and the currency will be traded at around 6.20 against the dollar this year.