1st LD-Writethru: China dismisses worries about capital outflow

There is not and will not be a massive foreign capital outflow from China, the foreign exchange regulator said Thursday to reassure a panicked market before the Federal Reserve decides whether to hike U.S. interest rates.

"Depreciation pressure on the Chinese yuan has largely been removed and its value has almost stabilized," said Wang Yungui, a department director with the State Administration of Foreign Exchange (SAFE).

The Fed will hold a monetary policy meeting on Friday morning to decide whether to raise the interest rate. The hike, the U.S. central bank has hinted for months, could help repatriate capital from emerging markets to the United States for higher returns.

The yuan has substantially depreciated against the U.S. dollar since August, while China still maintains a large trade surplus and its economic fundamentals are still sound, he said.

"Therefore, there is no basis for massive outflows of foreign capital," said Wang.

However, he also admitted that sales of foreign currencies at Chinese banks are increasing, but the outflow is "not abnormal nor on a large scale."

In July, Chinese banks sold 184.9 billion U.S. dollars' worth of foreign currencies to individuals and institutions, and bought 141.5 billion U.S. dollars from them, resulting in a net sale of 43.4 billion.

"The main reason was that China's trade-oriented enterprises used foreign currencies to repay overseas loans," said Wang.

Nevertheless, SAFE has found some individuals and institutions split their purchase of foreign currencies from Chinese banks to bypass regulation.

The administration will not control lawful trade of foreign currencies, but it will crack down on illicit activities.

China's foreign exchange reserves declined by 93.9 billion U.S. dollars in August to about 3.6 trillion U.S. dollars, the fourth monthly drop in a row.

"We are assessing the impact of the U.S. rate hike. A preliminary study showed that the influence on the Chinese economy will be limited," said Zhang Xiangchen, Deputy China International Trade Representative.

In addition, SAFE is working with the People's Bank of China to create a foreign exchange regulation, which will serve as a legal basis for the yuan's convertibility on the capital account. Endit