Chinese banks' forex purchases increase, rising yuan eyed

China's central bank and commercial banks saw their yuan funds outstanding for foreign exchange continue to increase amid expectation of a rising yuan as the world's second largest economy gradually recovers.

After buying a record high of 683.7 billion yuan (109.2 billion U.S. dollars) worth of foreign currencies in January, Chinese financial institutions purchased 295.4 billion yuan of foreign exchanges in February, the 3rd straight month of increases, data from the central bank showed.

As of the end of February, Chinese financial institutions' total yuan funds outstanding for foreign exchange amounted to 26.83 trillion yuan.

Analysts attributed the continuing increases to companies' willingness to hold assets in yuan as its value has trended upward. On Wednesday, the yuan hit a record high against the U.S. dollar.

The phenomenon also suggests increasing capital inflow to China against the backdrop of a gentle recovery in the economy.

"The capital inflow and China's widening trade surplus in the first quarter are the major reasons for the yuan's appreciation pressures," noted Wang Tao, chief economist with UBS Securities.

To mop up excess liquidity resulted by the funds, the People's Bank of China has been draining liquidity via open market operations.

This week, altogether 76 billion yuan has been removed from the money markets through 28-day repos in the bank's regular open market operations

Considering the 59 billion yuan in central bank repos and bills maturing, it actually withdrew 17 billion yuan from the markets, a softer move from a week earlier, which analysts read as the bank's attempt to keep moderate liquidity to support the tepid economic recovery in the context of the lower-than-expected inflation data.

The country's consumer price index rose 2.1 percent year on year in March, down from a 10-month high of 3.2 percent in February, and the producer price index, which measures wholesale inflation, fell for the 13th consecutive month.

The mild inflation and relatively gentle recovery suggests little possibility of monetary tightening, while ample liquidity in the markets makes policy easing equally unlikely, according to analysts.

"The monetary policies will be set to neutral," said Peng Wensheng, chief economist at the China International Capital Corporation.

The Chinese economy saw its slowest growth in 13 years in 2012, increasing 7.8 percent, but growth began to show signs of recovery in the fourth quarter of last year.

China is due to release the key economic data for the first quarter next week.

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