Foreign exchange reserves still plentiful

There are still uncertainties facing China's cross-border capital flows, but the country retains the ability to weather any capital flow shocks, the State Administration of Foreign Exchange (SAFE), the country's foreign exchange regulator, said on Thursday.

Growth of the economy will be watched closely and investors may get nervous about fiscal and financial risks, Guan Tao, head of SAFE's department of international payments, told a news conference in Beijing.

Globally, the US Federal Reserve is normalizing its stance on monetary policy while central banks in Europe and Japan are ramping up their already aggressive policy easing.

The diverging policies of the world's major central banks together with fluctuations in major commodity prices, turbulence in emerging-market currencies, and geopolitical disputes are the main sources of uncertainties over China's cross-border capital flows, said Guan.

China faced pressure from capital outflows in the second half of last year.

Figures revealed by Guan at the news conference showed that China registered a net capital outflow of $9 billion in the third quarter of 2014, compared to an average of $38.9 billion in net capital inflows in the first two quarters.

Consequently, foreign exchange reserves shrank by $400 million in the third quarter, following an increase of $74.3 billion on average in each of the first two quarters.

SAFE has yet to disclose the data for the fourth quarter, but a continued deficit in the capital account is expected, according to Guan.

Addressing the issue of capital outflows, Zhang Lei, a Beijing-based macroeconomic analyst at Minsheng Securities, said US reindustrialization and its economic recovery have the effect of bringing money back into the US.

The trend will be increased by expectations for a strengthening of the US dollar and widespread speculation that the US Federal Reserve will raise interest rates later this year, accelerating capital outflows from China, Zhang told the Global Times on Thursday.

China's restructuring of its economy and the transition away from being led by investment is reducing expectations for investment profitability in the domestic market, Zhang noted.

However, Guan at SAFE downplayed fears of capital outflows arising from US monetary policy, noting that China retains sufficient foreign exchange reserves to deal with any problems.

China still holds the world's largest foreign exchange reserves, which totaled $3.84 trillion at the end of December 2014, according to data from the central bank.

Guan also noted that China remains a favored destination for longer-term investment from overseas, partly because it will continue running a current account surplus, especially a solid goods trade surplus.

In addition, the economy's medium- to high-speed growth still places the country among the world's fastest-growing economies, and the yuan's strength may be sustained, helping rein in capital outflows.

At the news conference, Guan also reiterated that the central bank is gradually moving away from regular interventions in the foreign exchange market, as the country is pushing for a market-oriented yuan exchange rate formation mechanism.

The central bank's gradual exit from its regular interventions allows for more normalized two-way fluctuations in the Chinese currency, Bank of Communications economists wrote in a research report e-mailed to the Global Times on Tuesday.

Therefore, speculative short-term cross-border capital flows can be effectively prevented from happening, and the efficiency of domestic monetary policy will be enhanced, said the research report.

For the whole of 2015, Bank of Communications economists expect a recurrence of inflows and outflows in cross-border capital, and growing fluctuations in the yuan's exchange rate.

But Minsheng Securities' Zhang emphasized that the fluctuations will most likely be seen in the yuan spot market rather than the central parity rate.

The dollar-yuan central parity rate is considered a daily reference exchange rate to track the yuan's trading level.