Foreign capital, hot money inflows fall in May

The amount of yuan used to buy foreign exchange from exporters dropped significantly in May, indicating a fall off in foreign capital coming into the country.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

According to data filed with the People's Bank of China (PBC) Monday, <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />China's funds outstanding for foreign exchange increased by 131.56 billion yuan ($19.31billion) in May, a steep drop of 54 percent over the previous month.

"The European debt crisis has triggered some countries' capital pullouts to reinforce their home markets," Lian Ping, chief economist at the Bank of Communications said Tuesday.

"The foreign capital outflows may also be due to rising concerns about the slowdown in China's economic growth rate as recent measures to rein in home prices have started to take effect," Lian added.

But Zhu Jianfang, chief macroeconomic analysts of CITIC Securities, said the data indicated that it will still take time to see whether the foreign capital outflow is a long-term development trend or just a one-off event brought on by external factors.

"The PBC may also hold off on increasing reserve ratios, since liquidity may tighten soon when foreign capital, often in the form of hot money, flows out of the economy," Zhu said.

The PBC has already increased deposit reserve ratios three times this year.

The country's trade surplus was $19.5 billion last month. Add on the foreign direct investment of $8.1 billion and the total of $27.6 billion far exceeds the country's funds outstanding for foreign exchange in the same month, further supporting the argument that the discrepancy is caused by hot money outflows rather than meaningful investment pullouts.