The detail tables for January 2012 monetary statistics published by the People’s Bank of China show that the position for FX purchases reversed their rise in January, stabilising the downward trend apparent in the last quarter of 2011. The position for FX purchase increased by RMB141 billion for January.
However, the increase can largely be attributable to the trade surplus for January, which came in surprisingly higher. Excluding trade surplus, capital flow remains negative even if the magnitude of outflow has been greatly reduced. On an ex-trade-surplus basis, capital flow would be negative RMB31 billion, much smaller than previous 3 months. Thus even though outflow continued, it has been slowing down greatly into the “normal” range that we have seen in non-crisis times.
Again, as stressed before, continuous outflow would introduce a tightening bias to monetary conditions. Thus it is important to look at this measure to see if outflow continues in the coming months. I expect more cuts in the reserve requirement ratio if the outflow proves to be persistent:
