Net foreign currency purchases decline in May

More monetary policy easing needed to maintain government's economic growth target, say experts

Net foreign currency purchases by Chinese lenders hit a nine-month low in May, on lower forex inflows and wider yuan fluctuations.

The People's Bank of China, the central bank, said on Monday that the lenders' foreign currency purchases were just $38.7 billion in May, down 67 percent from the $116.9 billion in April and 83 percent from the $198.3 billion in March.

The decline in inflows comes after the yuan broke a decade-long trend of steady appreciation against the dollar earlier this year.

The Chinese currency has lost around 3.4 percent year-to-date against the dollar, after gaining over 30 percent since 2004 with little setbacks.

The yuan has also been more volatile this year, especially after the central bank doubled the yuan's daily trading band against the dollar to 2 percent in March.

The PBOC set the yuan's daily reference rate 34 basis points lower on Monday at 6.1537 a dollar, after the currency recorded its recorded its biggest weekly jump in two and a half years last week.

Higher volatility makes it harder for speculators to bet on the yuan, and analysts believe that partly explained the decline in fund inflows in recent months. Trade also played a part, as China's trade surplus narrowed 13.6 percent in the first five months of the year, to 436.6 billion yuan.

Fund inflow creates money supply in China, because, under Beijing's capital rules, the Chinese banking system buys all the incoming foreign currencies, through either trade or investment, and issues local currency instead, which increases the liquidity level in the economy.

Analysts believe the reduced foreign exchange purchases by lenders will further strain the already tight liquidity level and drag growth.

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