An employee counts yuan banknotes at a bank in Beijing. China’s central bank and commercial banks bought $17.3bn worth of yuan in January.

Reuters /Beijing


China’s central bank and commercial banks bought 108.3bn yuan ($17.3bn) worth of renminbi in January, the second consecutive month that purchases have topped 100bn yuan, in a sign that more capital was leaving the country.
A Reuters calculation of central bank data released yesterday showed banks bought 108.3bn yuan of renminbi on a net basis last month, following a purchase of 118.4bn yuan in December – the largest in seven years.  
The large purchases of yuan are likely to complicate China’s monetary policy, as they tighten liquidity at a time the world’s second-largest economy is battling its worst downturn in 24 years.   This is especially so as China’s central bank has traditionally increased money supply by selling yuan – or buying foreign currencies – in most months, a point acknowledged by Lu Lei, head of the research bureau at China’s central bank.
Writing in the China Daily newspaper yesterday, Lu said it was no longer efficient for the central bank to increase money supply through foreign-exchange purchases when capital flows have become more volatile.
Analysts said the latest data supported arguments the central bank would further loosen monetary policy by reducing the amount of cash that banks must hold as reserves.
Xie Yaxuan, an analyst at China Merchant Securities, said he estimates the central bank and other Chinese banks will sell between zero and 500bn yuan worth of renminbi this year – a sharp fall from previous years when renminbi sales were in the region of several trillions of yuan. “The gap in the monetary base will be around 2tn yuan, which corresponds to two to three reductions in the reserve requirement ratio,” Xie said. As China’s economic growth rate slips, some investors have pulled funds out to search for higher returns elsewhere.
Such activity has been increased by the expected rise in US interest rates this year. In contrast, China cut its interest rates for the first time in over two years in November to shore up economic growth. Some Chinese firms are also taking advantage of a rising dollar to pay down outstanding foreign debt, China’s currency regulator said this month.
On February 4, the central bank lowered the reserve ratio for all banks for the first time in over two years, by 50 basis points. Reuters calculations showed the move could inject 600bn yuan into the system.