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The net inflow of capital into China may drop in the following years and rapidly fluctuate, continuing the trend formed in the fourth quarter of last year, the State Administration of Foreign Exchange (SAFE) said in its annual report on cross-border capital flow released Thursday.
The report showed that the net capital inflow into China's capital and financial accounts in the first three quarters of last year hit $250 billion. The fourth quarter saw a trend of net outflow of capital, bringing the total net capital inflow for the whole year down to $186.7 billion.
A strong investment drive among global investors, more open financing markets and expectations of the yuan appreciation were the reasons for the robust net inflow, according to the report.
But capital began to flow out in the fourth quarter as investors became more prudent due to the worsening debt crisis in Europe, the US economy witnessed a slowdown, and financial institutions tightened lending. There were also signs of the yuan depreciation in the quarter.
"The slowdown in capital inflows is closely related to the economies of China, Europe and the US," said Zhao Xijun, vice director of the School of Finance at the Renmin University of China.
China's rapid economic growth of the recent years has been driven by investment, creating a huge demand for capital with high returns on investment. However, as China is trying to move away from investment toward consumption as the main engine of growth, the demand for capital is set to shrink, Zhao said.
Also, Europe needs large amounts of capital to deal with the debt crisis. And the US is trying to bring production facilities of the US companies in low-cost regions back to the US. In such a situation, some capital outflow is natural, Zhao noted.
The yuan has already appreciated rapidly since 2005 from 8.27 yuan per dollar in 2005 to the current level of around 6.3 yuan.
The currency will continue to appreciate in 2012, but won't break the 6 yuan per dollar mark, Zhang Lei, a macroeconomic analyst at Minsheng Bank, told the Global Times Thursday.
