Interpac Business and Migration Solutions Melbourne Australia

(December 18, 2011)

BEIJING - China experienced capital outflows for a second consecutive month in November,which could prompt policymakers to further loosen monetary policy and perhaps even returnthe yuan to being pegged against the US dollar, as it had been in 2008, analysts said onMonday.

Chinese banks' yuan positions for foreign-exchange purchases fell by 27.9 billion yuan ($4.43billion) in November amid increasing global economic uncertainties and concern about adomestic economic "hard landing".

The amount of foreign exchange purchased by Chinese banks is usually seen by analysts as akey indicator of cross-border capital flows.

The value of the purchases fell by 24.9 billion yuan in October, the first time in four years thatChina reported a decrease in foreign-exchange purchases by banks.

The figures could "prompt the central bank to cut the reserve requirement ratio (RRR) again tooffset the recent decline of foreign-exchange purchases and capital outflows," Zhang Zhiwei,chief economist for China at Nomura International (Hong Kong) Ltd, told a news briefing inBeijing.

Zhang forecast the People's Bank of China (PBOC), or central bank, would cut the RRR soonby another 50 basis points and loosen requirements for banks' loan-to-deposit ratios tostabilize domestic liquidity.

Zhang said that increasing capital outflows reflected China's shrinking trade surplus andslowing foreign direct investment (FDI) in the short run.

Other factors, according to Zhang, include changes in investors' risk appetites as the sovereigndebt crisis in the eurozone deteriorates.

Analysts warned that if the trend of capital outflows continued, China might return to a dollarpeg, as it did during the world financial crisis in 2008.

Instead of allowing for the yuan's steady depreciation, the PBOC has set the middle-tradingprice of the yuan at a persistently high level. The aim is to stabilize the yuan's value against theUS dollars as investors sell the currency on expectations that it will further depreciate.

"If such exchange-rate stability fails to change market expectations of a weakening yuan, it willcause more capital outflows and the situation won't ease at least until the first quarter of nextyear," said Lu Zhengwei, chief economist with Industrial Bank Co Ltd.

Analysts said that the Chinese currency will continue to face depreciation pressure, eventhough the PBOC has guided the dollar-yuan daily fixing rate higher.

"Capital outflows, together with a narrower trade surplus and slowing FDI, are likely to reduceappreciation expectations and reinforce depreciation expectations, given a weakening globaleconomy and investor sentiment," Chang Jian, Huang Yiping, and Yang Lingxiu, economistswith Barclays Capital, wrote in a research note.

Source from Chinadaily.com