Second Month of Capital Outflows Prompts China to Cut Lenders’ Reserve Ratios

Chinese central bank capital outflows exceeded inflows for the second month in November as yuan positions at financial institutions accumulated from foreign-exchange purchases fell to 25.46 trillion yuan, down 27.9 billion yuan from the previous month.

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Chinese central bank data signaled that capital flowed out of the nation for a second month in November, as bets for yuan appreciation diminished. In the past two months, the figure declined a combined 52.8 billion yuan, marking the first back-to-back drop since at least 2000.

Forward contracts on China’s currency weakened on concern that outflows of investment and a narrowing trade surplus will ease pressures on the yuan to appreciate. Reduced inflows are also curbing the supply of cash in the economy.

And economists expect capital outflow to continue into early next year. Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd., said, “The global economy will be in its most difficult time this quarter and next and the next few months will likely be the most volatile time for the global financial market.”

China’s trade surplus narrowed 35 percent last month, compared to the year earlier, while foreign direct investment fell for the first time since 2009. Chinese Minister of Commerce Chen Deming said in a statement today that the nation’s trade surplus this year may narrow by more than $30 billion from 2010.

As capital continues to flow out of China, the monetary authority cut lenders’ reserve ratios for the first time in three years this month, and economists are expecting further reserve cuts in the coming months.

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