China reported the first decline of foreign exchange purchases in seven months amid signs the United States will "taper off" its quantitative easing policy.
Foreign exchange purchases by financial institutions, a major indictor of capital inflows or outflows, fell 41 billion yuan ($6.6 billion) to 27.39 trillion yuan last month, according to datareleased by the People's Bank of China, the central bank, on Monday.
The decline came against the backdrop of a hightrade surplus of $27 billion and strong foreigndirect investment inflows of $14 billion during thesame month.
The data show that China experienced strong capital outflows in June, a sharp reversal from early 2013, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc
It said tightened regulation in recent months of cross-border trade settlements and capital flowshave "caged" arbitrage money flows disguised as trade deals, which also led to the moderation of capital inflows.
"There is no sign of a collective withdrawal of foreign investment."
Zhang said: "The capital outflows in June reinforce our view that the central bank will cut the reserve requirement rratio by 50 basis points in each quarter from the third quarter of 2013 to the second quarter of 2014."
He said China will experience a prolonged period of capital outflows in the second half of thisyear and the first half of 2014 as growth slows and investors worry about a potential hardlanding in China.
"The PBOC will need to cut the reserve ratio to offset the negative effects from capital outflows on domestic liquidity conditions."
In a recent statement, the PBOC said it will keep the money market stable with a combination of tools, iincluding open market operations, re-lending, rediscounting, short-term liquidity operations and standing lending facilities.
