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Chinese more willing to keep foreign currencies


10:00, August 25, 2012

BEIJING, Aug. 24 (Xinhua) -- Chinese people were more willing to keep foreign currencies and sell their yuan-denominated assets in July, data from the State Administration of Foreign Exchange (SAFE) has indicated.

Individuals and institutions exchanged 127.5 billion U.S. dollars in foreign currencies for Renminbi through Chinese banks, while buying 127 billion U.S. dollars of foreign currencies from financial institutions during the month. This resulted in a foreign exchange surplus in banks of 500 million U.S. dollars, according to SAFE.

Although Chinese banks swung back to a foreign exchange surplus in July from a 3.6-billion-U.S.-dollar deficit in June, the amount of surplus has narrowed sharply from 5.1 billion dollars in May, 7.8 billion in March, 4.4 billion in February and 19.4 billion dollars in January.

The banks reported a foreign exchange deficit of 3.7 billion U.S. dollars in April.

Zhao Qingmin, a financial researcher with the China Construction Bank, said banks will no longer see huge foreign exchanges surplus as the market expects the yuan to devalue in the coming months.

"Now the Chinese enterprises and residents are more willing to keep their wealth in foreign currencies due to such a market expectation," Zhao said.

After the yuan's central parity hit a record high of 6.267 against the U.S. dollar on May 2 this year, the Chinese currency weakened by about 646 basis points, as of Friday, according to data from the China Foreign Exchange Trading System.

A separate report by the Institute for Financial Studies of Shanghai-based Fudan University said the yuan has weakened by about 0.88 percent against the greenback in the second quarter, marking the Renminbi's largest quarterly devaluation since 1994.

Compared with these spot market figures, forward contracts, which reflect investors' outlook towards the relative value of the Renminbi, showed they chose to convert their assets in foreign currencies as the yuan weakens.

In July, companies and individuals signed forward contracts with Chinese banks to buy 15.2 billion U.S. dollars in foreign currencies at a future date agreed by both sides. At the same time, investors agreed with banks in their forward contracts to exchange 11.8 billion U.S. dollars.

In the first seven months, the banks posted a cumulative deficit of 8.8 billion U.S. dollars in foreign exchange in forward contracts. This has raised concerns that an outflow of funds might be under way in the world's second-largest economy.

Zhao said the buildup of banks' foreign exchange deficit showed some enterprises tried to purchase currency forward contracts to manage their exchange rate risks and hedge against the yuan's devaluation.

In the January-July period, overseas business-related proceeds of domestic institutional and individual clients via banks totaled 1.44 trillion U.S. dollars, with 1.35 trillion U.S. dollars paid to overseas businesses, SAFE data showed.

Banks' forex surpluses, which make up part of China's foreign exchange reserves along with current account surpluses and foreign direct investment inflow, do not include banks' own foreign exchange transactions or interbank transactions, according to SAFE.

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