Chinese banks were net buyers of foreign exchange in October for the second month in a row, signalling a gentle recovery of capital inflows as the world's second-largest economy regains momentum on the back of pro-growth policies.
China's central bank and commercial banks bought a net 21.6 billion yuan ($3.47 billion) in foreign exchange in October, down sharply from a net purchase of 130.7 billion yuan in September, according to Reuters calculation based on data published by the central bank on Friday.
Despite the drop, the mere fact that China was a net forex purchaser in October could offer fresh evidence of a reviving economy, analysts said. Economic growth seems to have hit a trough in the third quarter and has since shown signs of stabilisation. Capital inflows also reflect a swelling trade surplus in recent months and quantitative easing policies adopted by developed economies, analysts said.
"This is a sign of persistent and moderate capital inflows into the country and as the broader economy is picking up, we expect the trend to continue in the months ahead," said Zhou Hao, an economist at ANZ Research in Shanghai. A week-long holiday at the beginning of October may have pushed more activity into September, helping to explain the sharp difference in purchase volumes.
Exports perked up more strongly than expected in October, with the surplus ballooning to its biggest in 45 months, despite worries of slack external demand A slew of other economic indicators for October ranging from factory output and investment to retail sales also showed the economic recovery is gaining pace.
The central bank's purchase of foreign exchange constitutes a basic component of money supply in the financial system. A rise in its level signifies an creation of base money but a fall implies a need to expand domestic credit creation by easing monetary policy in order to keep money supply growth steady. In recent months, the central bank has accounted for a lower share of foreign exchange purchase. The central bank only bought 2 billion yuan in foreign exchange in September, accounting for less than 2 percent of total foreign exchange purchases.