PBOC forex buying sees sharp drop

The People's Bank of China (PBOC) purchased a net 101.29 billion yuan ($16.52 billion) of foreign currency in May, a sharp decline from the previous month's net purchase of 284.34 billion yuan, official data showed Tuesday.

This marked the sixth month in a row of net purchase, suggesting continued capital inflows into the country, but the fr­eefall in the reading that is seen to measure one of the main sources of the country's money supply is believed to mirror the latest wave of investors panicked by the cash crunch.

A broader figure measuring the foreign currency balance of both the central bank and financial institutions was also released in mid-June demonstrating similar trends, with the net purchase of foreign currency by both the monetary authority and all financial institutions shrinking to 66.86 billion yuan in May from 294.4 billion yuan in April.

The sagging foreign exchange purchase in May, which came after a series of curbing measures taken by the government to combat hot money inflows, was cited by many economists as one of the main factors behind the liquidity squeeze that recently hit the country's interbank market.

The net purchase of foreign currency is likely to fall further on expectations that the US Federal Reserve may soon exit quantitative easing, the Shanghai-based National Business Daily reported on June 25, quoting Xie Yaxuan, head of macroeconomic research at China Merchant Securities.

The falling trend may exacerbate liquidity problems, especially in mid-sized joint-stock commercial banks, considering the central bank's reiteration of its insistence on prudent monetary policy despite the high interest rates in the interbank money market.