Capital inflows no cause for alarm

China will be able to withstand pressure from foreign capital inflows in the second half of this year as the economy recovers, the country's foreign exchange watchdog said on Wednesday.

Improving market sentiment, rising foreign trade and speculation about higher interest rates have increased China's attractiveness to foreign investors, Guan Tao, head of the department of international payments at the State Administration of Foreign Exchange, said in Beijing yesterday.

But he said uncertainties remain as the world's major economies are undergoing various adjustments.

"Generally speaking, the yuan's exchange rate is approaching an equilibrium and two-way volatility will be normal in cross-border capital flows," Guan said.

China's trade surplus was US$86 billion in the second quarter while foreign direct investment reached US$8.3 billion. The combined inflow more than tripled from the first quarter.

However, net foreign exchange purchases by banks amounted to US$29 billion, dropping 82 percent from the first quarter, indicating an outflow of foreign exchange under capital accounts.

"Pressure was on the outflow side in the second quarter but overall there is still an inflow," Guan said, adding that it met the goal to balance cross-border capital flow.

China's economy grew slightly faster than expected in the second quarter as government stimulus measures kicked in.

Meanwhile, the yuan stabilized against the US dollar in the second quarter from a 2.5 percent drop in the January-March period.

The yuan closed at a three-month high yesterday in Shanghai at 6.1988 per US dollar. Economists from ANZ Bank and Standard Chartered Bank said they expect the yuan to gain slowly in the second half amid market-oriented reforms.