China expects long-term capital inflows to return despite recent volatility

China's currency regulator expects foreign investments in yuan-denominated assets to increase over the long run, despite recent fluctuations, financial media outlet Caixin reported on Thursday.

The remarks came as foreign investors trimmed their holdings of Chinese government bonds at the fastest rate in three years in February, while major economies including the United States tightened monetary policy, prompting market concerns about higher capital outflows and yuan depreciation.

"Short-term fluctuations in cross-border securities investments do not mean a reversal of the long-term trend of foreign investment into China's capital market," the State Administration of Foreign Exchange (SAFE) was quoted as saying.

"Affected by recent changes in the external environment, fluctuations of foreign investments in domestic stocks and bonds have increased, (but) it is normal under the complex international economic and financial situation." The foreign exchange regulator added that cross-border capital flows under the financial account remained normal and within control, while the value of the Chinese currency was stable.

A number of foreign investment banks and research institutions pointed out heavier capital outflows from China after the start of Russia's invasion of Ukraine.

"Outflows from China on the scale and intensity we are seeing are unprecedented," analysts at the Institute of International Finance said in a note in late March.

Data showed that foreign investors sold more than 45 billion yuan ($7.08 billion) on a net basis through the Stock Connect scheme in March, booking the biggest monthly outflow in nearly two years.

Separately, Guan Tao, global chief economist at BOC International and a former senior SAFE official, said the regulator has experience in handling such currency fluctuations should conditions worsen.

He wrote in a government paper published on Thursday that the private sector could play a role in cushioning the impact of such volatility on international payments.