Data released by the People’s Bank of China（PBC） show that funds outstanding for foreign exchange totaled 27.52 trillion yuan （$4.52 trillion） at the end of September， with newly increased funds outstanding for foreign exchange reaching 126.4 billion yuan （$20.78 billion）， a month-to-month increase of 100 billion yuan（$16.44 billion）. Minus foreign direct investment（FDI） and the current account surplus， this is the first net inflow since May.

Again， the substantial inflow of crossborder capital put China in a dilemma， leaving monetary policy little room to strike a balance between domestic and overseas markets， the real economy and the financial sector， interest and exchange rates.

Moreover， in the third quarter， foreign exchange reserves increased $160 billion to $3.66 trillion， far beyond market expectations， indicating that cross-border capital inflow has been intensifying.

An outcome of accelerated cross-border capital inflow is the surging exchange rate of the yuan. The central parity rate of the yuan against the U.S. dollar strengthened to 6.1352 on October 21， a record high since the exchange rate reform. The yuan has so far appreciated by 2.4 percent this year， faster than last year.

At the same time， major economies across the globe maintain low interest rates， while interest rates in the Chinese market are stable. Widening interest margins keep absorbing foreign capital， which in turn spurs cross-border capital flow and the appreciation of the yuan.

Although the United States avoided a debt default， risks have just been postponed rather than completely eliminated. When it comes to mid-term elections next year， a seesaw battle between Republicans and Democrats is bound to take place over issues like shutting down the government and the debt ceiling. It seems that the Federal Reserve will inevitably slower its quantitative easing （QE） exit.

Given that QE may continue to deepen in the world， the uncertainty of the external environment will make China stand at a nonplus in deciding its monetary policy. If the country doesn’t tighten liquidity， the risk of asset bubbles may emerge； if it does， the foundation for recovery may be undermined.

As the global economic situation has become increasingly complicated and downward pressure on the Chinese economy grows， macro-controls will be more difficult， resembling the case at the end of 2012.

On the one hand， since inflation is gradually rising up and cross-border capital inflow is jacking up the housing market， the PBC may tighten credit. In the third quarter， the number of prime sites in major cities exceeded 131， an increase of 41 year on year. The transaction prices of land in first-tier cities like Beijing， Shanghai and Shenzhen saw new records， completely wiping out the effects of real estate controls. Sufficient liquidity means the PBC will not loosen its monetary policy.

On the other hand， structural reforms will be the theme of the fourth quarter. The deepening of structural reforms will add to the downward pressure. Weak endogenous dynamic and a reduced policy stimulus may lead to a slight fall of economic growth. In this sense， the PBC is unlikely to significantly tighten its monetary policy.

Under such circumstances， China’s monetary policy should shift from quantitative to structural adjustment by directing mid- and long-term capital into sectors like urbanization， infrastructure construction， technological innovation and the financing of small and mediumsized enterprises.

A focus should be laid on retaining mid- and long-term capital， and improving the efficiency of liquidity supporting the real economy， in order to enhance the positive returns of the country’s monetary policy.