SHANGHAI: Recent ample yuan liquidity in China’s onshore market are not a result of excess money supply but reflect a lack of effective financing demand, a former foreign-exchange (forex) regulator says.
Chinese banks have recorded a surplus in net forex settlement and sales for over a year, primarily due to weaker forex demand rather than increased willingness to convert foreign currency into yuan, said Guan Tao, global chief economist at BOC International and a former official at the State Administration of Foreign Exchange.
He said the central bank injected a cumulative 596 billion yuan (US$88.06bil) worth of funds into the financial system on a net basis in the first four months of this year, in a bid to increase the supply of base money.
Yuan strength was primarily driven by a surplus in banks’ forex settlements, supported by China’s robust trade surplus. However, Guan said ample liquidity conditions in the domestic market should not be attributed to the forex settlement surplus.
“When the central bank does not purchase forex, the surplus in banks’ forex settlement and sales should generally reduce market liquidity. Current yuan appreciation primarily reflects the self-reinforcing and self-fulfilling nature of the trade surplus and appreciation expectations in an appreciating environment.” — Reuters
