Data for January showed Chinese banks continuing to sell FX to the non-bank sector last month. This has a few implications. First, the fact that banks were net sellers despite a record trade surplus and strong FDI inflows points to large scale capital outflows in January. Second, it is consistent with our view that the People's Bank (PBOC) has continued to sell FX in order to shore up the renminbi, which fell to the bottom of its trading band last month. (See chart below.) FX sales by the PBOC, which withdraw domestic liquidity, probably played a key role in the recent decision to cut the reserve requirement ratio. Going forward, continued intervention to support the renminbi will force the PBOC to carry out further liquidity injections in order to prevent monetary tightening.
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