China became a net seller of foreign exchange in November after its trade surplus and foreign investment inflows shrank, highlighting stiff external headwinds still facing the world's second-largest economy. China's central bank and commercial banks sold 73.6 billion yuan ($11.8 billion) worth of foreign exchange on a net basis in November, Reuters calculation of central bank data published on Friday showed, reversing from two consecutive months of net purchases.
China had bought 21.6 billion yuan of foreign exchange on a net basis in October. Analysts said the net sale of foreign currencies was a sign that global economic weakness has dampened demand for Chinese goods and crimped corporate spending. China's export growth pulled back to 2.9 percent in November from 11.6 percent in October, well below market expectations and fanning worries that still anaemic external demand remained a drag on the broader economy in the coming quarters.
China's foreign direct investment inflows, meanwhile, fell 3.5 percent in the first 10 months of the year, extending the longest run of decline in three years. Despite other economic activity data in November pointing to a mild recovery in the economy, some analysts said foreign investors remained concerned about the downside risks and were cautious about investing in China.
"One of the downside risks facing China's economy is the policy uncertainty in the domestic property market," said Nie Wen, an analyst at Hwabao Trust in Shanghai. Shen Jianguang, China economist at Mizuho Securities in Hong Kong, said rising Chinese outbound investment in recent months also led to more capital flows than before. "Chinese companies are accelerating overseas investment and more Chinese are touring overseas and consuming abroad, which all contribute to capital outflows," Shen added.
Official figures from the commerce ministry showed China's outbound direct investment from non-financial firms in the first 10 months totalled $58.2 billion, up 25.8 percent year-on-year. The central bank's purchase of foreign exchange constitutes a basic component of money supply in China's financial system. Economists say larger purchases point to a creation of base money while a fall implies a need to create more credit by easing monetary policy to keep growth in money supply steady.
Chinese banks have alternated between net buying and selling of foreign currencies in recent months in a trend that reflects bigger gyrations in the yuan as it approaches a level many analysts believe is close to equilibrium. China's top foreign exchange regulator has downplayed risks of increasingly volatile capital flows, citing large foreign exchange reserves, a steady trade surplus and firm economic growth as a backdrop for stability.
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