China's funds for foreign exchange drop unexpectedly

Lian estimated that it was unlikely China would register rapid growth in funds for foreign exchange in the coming months.

As China accelerates its outbound direct investment (ODI), capital outflow led to the shrinking funds for foreign exchange.

China's ODI in non-financial sectors soared 84.9 percent from the previous year to$ 9.21 billion in July, compared with a year-on-year decline of 5 percent in the January-June period.

Chinese investors made $52.6 billion in ODI for the first seven months of 2014, following a record high of $108 billion seen last year.

Chinese banks saw greater volatility in funds outstanding for foreign exchange since the beginning of this year.

New funds for foreign exchange rose to 437 billion yuan in January, the highest level since October last year. The number kept falling month by month in the first half of this year, with a fall in total funds outstanding in June.

The drop triggered discussion as to whether the central bank should lower the reserve requirement ratio (RRR) to allow more liquidity into the market.

Zhong said it was hard for the PBOC to move that quickly just based on the fluctuation within a single month.

"Only when the outflow of funds for foreign exchange continues and with a deficit of the money base will the PBOC resort to a full scale RRR cut," Zhong added.

New yuan loan growth dips in Aug	China 2013 outbound investment hits record high