China watching volatile capital flows - forex regulator

BEIJING (Reuters) - China is closely monitoring its cross-border capital flows, the foreign exchange regulator said on Thursday, amid signs that money is leaving the world’s second-largest economy as it slows.

But China is able to manage risks from capital outflows as the country still posts a solid trade surplus, the State Administration of Foreign Exchange (SAFE) said.

“China’s cross-border capital flows still face many uncertainties,”, Guan Tao, head of the department of international payments at the SAFE, told a news conference.

Still, China will continue to see a relatively big current account surplus this year, he added.

“The pattern of having trade surpluses and capital outflows will become more normalised,” he said.

“We will strengthen monitoring and early warning on cross-border capital flows... and crack down on illegal capital flows.”

China’s relatively fast growth and higher interest rates may help attract foreign investment, but investors may also be nervous about its economic, financial and fiscal risks.

Globally, polices of major central banks could diverge as the U.S. Federal Reserve is “normalising” policy while central banks in Europe and Japan are stepping up policy easing, he said.

The Fed is widely expected to raise interest rates later this year.

Chinese banks sold a net $46.5 billion in spot foreign exchange settlements in the fourth quarter of 2014, up from $16 billion in the third quarter, the State Administration of Foreign Exchange (SAFE) said.

For the whole of 2014, Chinese banks still bought a net $125.8 billion worth of foreign exchange.

China’s central bank and commercial banks bought the most yuan in seven years in December at around $19 billion (13 billion pounds), a Reuters calculation of data showed, suggesting some capital is leaving the world’s second-largest economy as growth slows.

Guan reiterated that the central bank is gradually exiting from its regular intervention in the foreign exchange market.

China’s economy posted its slowest growth rate in 24 years in 2014 at 7.4 percent, and a further slowdown is expected this year.

Economists expect policymakers to roll out more stimulus measures this year to prevent a sharper slowdown, including interest rate cuts and reductions in banks’ reserve requirement ratios (RRR) to allow banks to lend more.

Analysts at OCBC believe an RRR cut may be the central bank’s weapon of choice to counter the impact of any more significant capital outflows.

Reporting By Kevin Yao; Editing by Jacqueline Wong & Kim Coghill