China's central bank and other financial institutions spent 376.9 billion yuan ($59 billion) buying foreign currencies in August, a five-month high and a 71.6 percent jump from July, according to official data published on Wednesday.
The so-called position for foreign exchange purchase, which is mainly the central bank's purchase of foreign currencies from commercial lenders in the interbank market, is often used as a measure of capital inflows to China.
Economists at China International Capital Corp (CICC), a Beijing-based investment bank, wrote in a research report that a stronger yuan in August may have boosted hot money flows into China. The yuan rose 0.8 percent in August alone against the dollar, one of the strongest monthly gains since China de-pegged the yuan from the dollar in July 2005.
August foreign exchange purchases were the highest since March 2011 and exceeded the monthly average of 335.6 billion yuan in the first eight months of 2011.
To keep the yuan largely stable, the People's Bank of China buys foreign exchange inflows generated by China's trade surplus and foreign investment from commercial banks, resulting in an injection of yuan into the banking system.
The central bank then soaks up excess yuan in the system via open-market operations and higher bank reserve requirements to prevent the money from flowing into the economy and fuelling inflation.
But as long as foreign funds keep flowing into China, the central bank's efforts to soak up liquidity are not entirely effective because the surfeit of yuan in the banking system often leads banks to increase lending.
China's trade surplus in August narrowed to $17.8 billion, down 43 percent from in July, and FDI inflows last month were $8.4 billion.
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