(Yicai Global) Oct. 19 -- The balance of yuan outstanding for foreign exchange (forex) held by the People's Bank of China (PBOC) increased by USD128 million (CNY850 million) in September to CNY21.5 trillion, the first rise since October 2015, data from the central bank shows.
'Funds outstanding for forex' (FOFFE) refers to the corresponding local currency a domestic central bank infuses into the market to purchase foreign exchange assets.
As the yuan is not a freely-convertible currency under capital account, after foreign capital flows into China, it can only circulate after its conversion into yuan. Hence, the country needs to inject masses of funds to convert forex and must use its own currency to buy it, thus increasing the 'money supply' to amass FOFFE.
In other words, an increase in FOFFE means that the central bank must increase the base money in the real economy.
Over the past two years, due to yuan devaluation expectations, FOFFE has continued negative growth, and its contribution to the growth of the money supply has basically been negative. The central bank has also shifted its focus to open market operations and other monetary means to regulate market liquidity.
However, stabilization and appreciation of the yuan against the dollar this year has caused FOFFE to preserve low volatility since February as the decline has narrowed sharply from the same period last year.
The recovery of the balance of FOFFE indicates that the current foreign exchange market is relatively steady and the disturbance FOFFE causes the money supply is tending to stabilize as monetary policy independence grows, the Financial News reported.