Foreign Capital Outflows Hit China in June; Net Outflow Was First Since November, Contributing to Credit Crunch

Updated July 22, 2013, 7:27 a.m. ET

Foreign Capital Outflows Hit China in June

Net Outflow Was First Since November, Contributing to Credit Crunch

BEIJING—Foreign capital flowed out of China in June as economic growth slowed and a rise in the Chinese currency stalled, contributing to a credit crunch that briefly strained the nation’s banking system. The credit crunch has eased considerably since last month as the central bank injected liquidity in the interbank market, where banks lend funds to each other, but the squeeze raised doubts about the strength of China’s banking and financial system. The net outflow of foreign capital in June was the first since November. The People’s Bank of China and financial institutions sold a net 41.2 billion yuan ($6.71 billion) worth of foreign currency in June compared with net purchases of 66.86 billion yuan in May, according to Wall Street Journal calculations based on central bank data released Monday.Most of those sales or purchases are made by the central bank, and analysts view the figures as a key indicator of inflows and outflows of foreign funds.

Analysts said that the lower foreign currency purchases also reflected a 3.1% drop in exports in June compared with the year-ago period, reflecting weak overseas demand and tougher trade reporting rules after China cracked down on exporters who have been overreporting exports to obtain tax rebates.

“In June, we saw a drop in fund inflows as the yuan’s appreciation lost steam and the regulators’ controls on irregular trade settlements took effect,” said Li Wei, an economist at Standard Chartered Bank.

The total of local currency used to buy foreign currency totaled CNY27.39 trillion at the end of June, lower than the CNY27.43 trillion at the end of May, the data from the People’s Bank of China showed.

China’s banks were caught in a credit squeeze that began in late May due to a combination of factors that ranged from lower capital inflows from abroad to seasonal tax payments and a mismatch of banks’ shorter-term funding with their longer-term lending.

The overnight lending rate on the interbank market, where banks lend to each other, shot up to 30% on June 20 at one point at the peak of the credit squeeze. It has since fallen sharply, settling around 3.1% on Monday, near its pre-credit crunch levels.

The central bank has injected a net 195.1 billion yuan into the interbank market since early June, helping to ease the squeeze on banks.

Mr. Li said he didn’t expect the outflow of funds to continue as the central bank has once again begun guiding the local currency higher after a brief pause. The yuan has so far risen about 1.5% against the U.S. dollar this year despite the brief pause in its climb.