China's yuan funds for foreign exchange rise

BEIJING - China's financial institutions saw their yuan funds outstanding for foreign exchange increase 130.68 billion yuan (20.71 billion US dollars) in September after two months of falls, data issued by the central bank on Friday showed.

Analysts attributed the rally to a stronger yuan and a much larger trade surplus, expecting it to boost the money market liquidity and make further monetary loosening less likely.

The yuan funds have been shrinking since July as a result of slowing foreign trade and dropping foreign direct investment amid global economic woes, according to figures from the People's Bank of China (PBOC).

The monthly growth in September was the second highest this year, only slightly less than the 140.9 billion yuan rise in January, and brought the total funds for foreign exchange to 25.77 trillion yuan as of the end of September, the PBOC said.

More overseas funds flowed into China because the country's economy showed signs of stabilizing and the yuan gained against the greenback in September, while a rebound in trade surplus also contributed to the yuan fund increase, according to Zhao Qingming, a financial expert with the University of International Business and Economics.

China's economy expanded 7.4 percent year on year in the third quarter of 2012, slowing for a seventh straight quarter, but Chinese Premier Wen Jiabao said earlier this week the economy has started to stabilize and shown positive changes.

Meanwhile, the Chinese currency has strengthened by more than 300 basis points in the past month to reach around 6.30 against the US dollar as investors' anticipation for appreciation built up.

Trade surplus in September rose to 27.67 billion U.S. dollars from 26.66 billion US dollars in August as exports picked up, according to customs data.

Peng Wensheng, chief economist of the China International Capital Corp. Ltd., said the yuan funds' return to growth will ease money supply on the inter-bank market for the time being and reduce the likelihood of more loosening moves from the central bank this year.

The amount of yuan funds outstanding for foreign exchange decides the amount of yuan funds that the central bank has to inject into the domestic market, as the yuan remains inconvertible under the capital account.

To bolster the slowing economy, the PBOC has cut interest rates and the reserve requirement ratio, or the proportion of deposits lenders must set aside as reserves, twice this year.