Chinese commercial banks absorbed about $170 billion in foreign exchange from the financial system last year, mainly through yuan-dollar swaps, state media on Wednesday cited a former official as saying.

The Shanghai Securities News cited Xu Shanda, former deputy head of the State Administration of Taxation, as saying that the State Administration of Foreign Exchange (SAFE), the foreign exchange regulator, absorbed about 1 trillion yuan through the swaps in 2009.

Xu estimated that such swaps could exceed $500 billion this year, thereby taking some 3 trillion yuan out of the financial system, but did not say how he had arrived at that estimate.

The central bank started conducting such yuan-dollar swaps in late 2005, but maintains tight secrecy over its activity in the market, partly because it does not want prices quoted for the swaps to lead to speculation over yuan appreciation.

SAFE is an arm of the central bank and is in charge of foreign exchange policy and managing the country's $2.4 trillion in foreign reserves.

Authorities have been struggling to absorb a massive amount of yuan liquidity that has flowed into the interbank market as a result of inflows of foreign exchange from the trade surplus, foreign investment and speculative capital.

It has so far raised banks' required reserves twice this year and has stepped up its sterilization of such inflows through its open market operations, draining a net total of about 193 billion yuan so far this year.

Xu said that stepping up forex swaps would be a better way of absorbing such liquidity than increases in banks' required reserves, but did not specify why.

(Reporting by Jason Subler and Fang Yan; Editing by Jacqueline Wong)

China