'Further volatility' for capital flows in H2

Cross-border capital flows will remain volatile in the second half of the year, the nation's foreign exchange regulator said on Wednesday.

Guan Tao, the head of the department of international payments at the State Administration of Foreign Exchange, told a news conference in Beijing that China faces pressure from capital inflows because the economy is stabilizing, which will boost market confidence. The pressure will also increase as exports recover and the difference between domestic and foreign interest rates persists.

On the other hand, Guan said, uncertainties are still casting shadows over China's economy as it faces the dual challenges of restructuring and decelerating growth. In addition, the monetary policies of major economies remain uncertain as these countries are still making adjustments, he said.

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"The renminbi's exchange rate is now near equilibrium in general. Given that, the two-way fluctuation of cross-border capital flows will become the new normal," he said.

Foreign exchange receipts and payments were extremely volatile during the first half.

The nation faced huge pressure from capital inflows in the first quarter. The foreign exchange settlement-sales surplus reached $159.2 billion, well above the $28.6 billion representing the sum of the trade surplus plus net inflows from cross-border direct investments by non-financial institutions.

But the pressure reversed in the second quarter. The foreign exchange settlement-sales surplus dropped to $29 billion (down 82 percent quarter-on-quarter) while the trade and investment surplus surged to $94.3 billion.

"This change shows that with the stronger two-way fluctuation in the yuan against the dollar, domestic companies have adjusted their behavior regarding foreign exchange receipts and payments. Meanwhile, the Chinese economy will be affected by a number of uncertain and unstable domestic and foreign factors," Guan said.

Effective March 17, the yuan's trading band against the dollar doubled to 2 percent above or below the daily reference rate the central bank sets in the interbank spot foreign exchange market.

SAFE statistics also showed that Chinese companies have become more willing to hold foreign currencies－but less willing to borrow them. In the second quarter, domestic foreign-currency deposits increased by $86.3 billion from the first quarter, while outstanding domestic bank loans in foreign currencies dropped by $2.3 billion.

From March to June, domestic companies' forward foreign-exchange settlements decreased by 49 percent from January and February while their forward foreign-exchange purchases increased by 14 percent.

Now, the supply and demand of foreign currencies has become more balanced.

Guan said: "This is the change we hoped to see. It is not an unexpected market shock and it has met our regulatory goals."