Report shows fall in China forex purchases

China witnessed a decline in foreign exchange purchases for the second straight month in July, signaling continuous capital outflow from the world's second-largest economy.

According to data released by the People's Bank of China on Tuesday, yuan holdings among Chinese lenders for purchasing foreign exchange stood at 27.36 trillion yuan ($4.4 trillion) at the end of July, a decrease of 24.5 billion yuan from one month earlier.

Lian Ping, chief economist at the Bank of Communications, said tapering off of United States' quantitative easing policies is attributable to the declines, as direction of global capital flows started to change.

"In addition, economic slowdown of China has also made the country less attractive to international capital," Lian said.

He said weaker foreign exchange purchases might continue in the second half, but it's also possible that Chinese economy starts to recover later and thus drive up the purchases for a short period.

Unlike in other Asian countries, such as India, Indonesia and Thailand, the direct financial impact of future tapering-off of round three of quantitative easing in the US on China should be very small, as China does not have an open capital account, said Louis Kuijs, chief China economist at the Royal Bank of Scotland.

He said in 2012, China saw an apparent net outflow of financial capital of 3.5 percent of GDP, but a large part of this was actually carried out by Chinese firms — making use of the arbitrage opportunities available to them as a result of the internationalization of the Chinese yuan — rather than being international money.

"These apparent outflows were in part unwound in the first half of 2013 by apparent net financial inflows, in large part again carried out by Chinese companies," Kuijs said.