China's banks buy forex in February

China's banks bought foreign exchange from firms on a net basis in February for the third consecutive month, data showed, suggesting corporate demand for yuan-denominated assets is rebounding as the world's second-largest economy recovers. Chinese central bank and commercial banks bought 295.4 billion yuan ($47.63 billion) worth of foreign exchange on a net basis in February, according to Reuters calculation of central bank data.
February's net foreign exchange purchase is down from January's record 683.7 billion yuan but still the second highest level since August 2011. Analysts said persistent foreign exchange purchases suggests companies are betting on a rising yuan as they opt to hold assets in renminbi while denominating their debt in foreign currencies.
"The forex purchase data is still quite high in February, especially considering there was a long Chinese New Year holiday," said Zhou Hao, analyst at ANZ in Shanghai. "(This) partly reflects rising market appetite for yuan assets as the economy gathers steam." The yuan rose to a record-high against the dollar on Wednesday for the second time in five days, testing the limit of an official trading band as Beijing demonstrated tolerance for measured appreciation in the currency.
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 pledged to contain risks from volatile cross-boarder flows and take necessary steps to balance the country's international payments. China saw current account surplus of $193.1 billion and capital and financial account deficit of $16.8 billion in 2012, the first deficit since Asia financial crisis.