China posts monthly forex transaction deficit

Chinese bought more foreign currency than they sold in August, resulting in the first monthly deficit in foreign exchange transactions in 13 months, China's foreign exchange regulator said on Tuesday.

Chinese institutions and individuals bought 147.4 billion U.S. dollars in foreign currency and sold 146.6 billion U.S. dollars in exchange for 903.3 billion yuan last month, according to data from the State Administration of Foreign Exchange (SAFE), China's forex regulator.

The country's growing appetite for foreign currency led to a deficit of 800 million U.S. dollars in foreign exchange transactions in the month.

The deficit was compared with a surplus of 1.2 billion U.S. dollars in July, and the fluctuation in forex transactions contributed to changes in China's foreign reserves.

"The monthly deficit in forex transactions showed short-term capital inflow has slowed or even a capital outflow has appeared to some extent," said Cai Hongbo, an associate professor in economics and business administration with Beijing Normal University.

As people's expectation of the renminbi exchange rate has changed, the private sector seems more willing to hold foreign currency.

"However, we don't have to be worried about the monthly deficit in foreign exchange transactions because it's not the first time that China has recorded such deficits," Cai said, adding that two-way flow of cross-border capital will become normal as expectations are divided.

The latest data on foreign exchange transactions followed a surprising drop in China's funds outstanding for foreign exchange and a decline in foreign direct investment (FDI) for August.

Considered part of China's broad money supply, funds for foreign exchange stood at 29.5 trillion yuan (4.79 trillion U.S. dollars) at the end of August, down 31.2 billion yuan from a month ago, the central bank said on Monday.

Meanwhile, FDI into China's mainland dropped to 7.2 billion U.S. dollars in August, down 14 percent from a year ago and its lowest volume in nearly five years, the Ministry of Commerce said on Tuesday morning.

Once carried out, Chinese companies and individuals' forex forward contracts are expected to bring Chinese banks 140.8 billion yuan in net forex purchases in the future.

In the first eight months, Chinese banks bought 1.26 trillion U.S. dollars' worth of foreign currency while selling 1.08 trillion U.S. dollars' worth of forex, with a net forex purchase worth 188.6 billion U.S. dollars.

During the January-August period, banks took in 2.17 trillion U.S. dollars on behalf of clients through their overseas businesses and paid 2.09 trillion U.S. dollars to overseas accounts at clients' request.