China is expected to have more capital inflows in the rest of the year although there could be some continued volatility in the flows, the nation’s foreign exchange regulator said on Wednesday.
Guan Tao, the head of the international payments department at the State Administration of Foreign Exchange (SAFE), said a stabilizing economy is helping to boost investor confidence.
Foreign trade conditions have also started improving and the interest rate differential may remain, which may lead to increased capital inflows, the official said, according to RTHK.
However, capital flows could remain turbulent as China still faces some uncertainties and risks from monetary policy adjustments in other major economies.
But he said the renminbi exchange rate is now near equilibrium, and that two-way cross-border capital flows will become a new norm.
On the other hand, the large pile-up in China’s foreign exchange reserves has led to a big increase in the central bank’s base money, which may stoke inflation and push up asset prices, Guan said.
It will become increasingly difficult to manage the foreign reserve as its size expands, and this may even trigger disputes in international trade and investment, he said.
We have to develop a foreign exchange market and improve foreign exchange rate mechanism to control the capital flows, Guan added.
China holds the world’s largest foreign exchange reserves, at about US$3.99 trillion.
During a visit to Africa in May, Premier Li Keqiang noted that having a very large foreign reserves chest is a huge burden as it could fuel inflationary pressures.
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