China maintains deficit in forex

China maintained a deficit in its foreign exchange (forex) settlements in the first half of the year, official data showed on Thursday. Domestic lenders bought $866.5 billion in foreign currency and sold $971.9 billion, resulting in a net sale of $105.4 billion, said Wang Chun­ying, spokeswoman of the State Administration of Foreign Exchange (SAFE). The deficit was $62.5 billion in the second half of 2014. China saw a surplus of $125.8 billion in its foreign exchange settlements in 2014, but the volume narrowed significantly compared with $270.2 billion in 2013, SAFE data showed, indicating easing capital inflows. But volatility in cross-border capital flows has been easing, Wang said. The forex settlement deficit hit $91.4 billion in the first quarter, but it narrowed to $13.9 billion in the second quarter. In April alone, the deficit hit $17.3 billion, but in May there was a $1.3 billion surplus and in June there was a surplus of $2.1 billion, SAFE data showed. The stronger dollar was a key factor in China's cross-border capital outflows in the first quarter, but the pace of outflows slowed in the second quarter, Wang said. "There was no continuous large-scale capital outflow in the first half of the year. The pressure in the second quarter was down from the first quarter," Wang said. Capital outflows will not pose a major concern to the economy, and such flows are likely to slow in the second half, a J.P. Morgan economist said Wednesday. Market expectations of a weaker yuan and the government's decision to let companies hold more foreign currency contributed to the outflow, which to some extent actually reflected positive changes, according to Zhu Haibin, chief economist at J.P. Morgan China. Forex reserves dropped $113 billion in the first quarter, but only $36.2 billion in the second quarter. It is common practice for banks to sell foreign currencies to companies or individuals and buy foreign currencies from them. These transactions can be used to measure the supply-demand relationship in the inter-bank forex market, and they also affect the yuan's exchange rate, experts said.