China Aug FX purchases surged to 376.9bn yuan

BEIJING: China's central bank bought 376.9 billion yuan ($59 billion) worth of foreign currencies in August, up 71.6 percent from July, according to official data published on Wednesday.

The figure is often used a measure of capital inflows to China.

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.

Copyright Reuters, 2011