A dramatic slowing of the pace of capital inflow in the first half of this year is further confirmation of the marked change in China’s financial fortunes. According to the Bank of China, there has been only a small increase in the yuan positions of financial institutions as a result of foreign exchange transactions with the central bank in the first five months of 2012. In recent years, it was the extraordinary growth in dollar receivables by exporters which provided much of the fuel for China’s rocket-powered expansion.
If capital inflow remains drought-affected in the months ahead then the PBOC must consider a significant reduction in bank reserve requirements, currently set at a prohibitive 20% for the large banks. Although this ratio has been reduced by 150bp since November, we could very well see more aggressive cuts ahead, especially if the economy fails to respond to recent stimulus measures. The recent performance of the renminbi implies that foreign investors are still reluctant to pour money into the country like they used to. At the same time, mounting anecdotal evidence suggests that Chinese nationals are still minded to convert some of their wealth into hard currencies.
The yuan is no longer the one-way bet so many commentators have assumed that it is.