China forex settlement surplus narrows in 2014

China continued to see a surplus in its foreign exchange settlement in 2014, but the volume narrowed significantly, indicating easing capital inflows to the country, official data showed on Thursday.

Chinese lenders bought 1.9 trillion U.S. dollars' worth of foreign currency last year and sold 1.77 trillion U.S. dollars, resulting in a net buy of 125.8 billion U.S. dollars, the State Administration of Foreign Exchange (SAFE) said in a statement.

This marked a 53-percent drop from the surplus seen a year earlier, said Guan Tao, director of the International Balance of Payment Department of SAFE, at a press briefing.

Notably, after registering surplus in the first two quarters of 2014, the foreign exchange settlement swung to a deficit in the third quarter and saw the deficit widening to 46.5 billion U.S. dollars during the October-December period, fanning concerns of massive capitals flowing out of China as the economy slowed.

Guan attributed the fluctuations to the U.S. QE tapering that led to capital flowing out of emerging markets, as well as investors' cautious sentiment towards China's slowing expansion.

"The current adjustment is moderate and within the limit," he noted.

Data out on Tuesday showed China's economy grew 7.4 percent in 2014, the weakest annual expansion in 24 years as the country is bracing the new normal period of slower growth but higher quality.

"The world economy went through an uneven and slow recovery in 2014," said Guan, adding that China registered a relatively high economic growth rate and RMB deposit rates will continue to be higher than those of other major currencies which can help maintain China's attraction to foreign capital.

The normalization of U.S. monetary policies this year will present both challenges and opportunities to capital flows for China. With a stable and relatively fast economic growth pace, China has ample foreign exchange reserves and a relatively strong buffer to cope with cross-border capital flows, he told reporters.

"The U.S. Fed's QE tapering and monetary policy normalization are on the basis of U.S. economic recovery prospects. If the United States can stage a solid economic recovery, it can translate into an improving export outlook for China," he added.

China should transform the pressure of U.S. monetary policy normalization into impetus for facilitating domestic reforms and opening- up as well as building an open and new economic structure, he stressed.

As investors are waiting for a possible monetary easing decision by the European Central Bank (ECB), Guan held that to some extent a potential ECB's QE can help cushion the tightening impact for the market exerted by the Fed's QE tapering.

"But a possible QE from the ECB is only one of those important external factors affecting China's cross-border capital flows and RMB exchange rates, and it should be taken into consideration with other factors to make an overall judgement and a contingency plan," Guan added.