China's foreign exchange
reserve reached US$1.2 trillion by the end of March, up 37.36 percent from the
same period last year, the People's Bank of China announced here Thursday.
"I'm not surprised at the figure," Cai Zhizhou, an economist with Beijing
University, said and added that forex sharp rise has become "normal".
China's forex reserve came to US$609.9 billion by 2004, US$818.9 billion by
2005 and US$853.6 billion by the end of last February, making the country
overtake Japan to become the biggest foreign reserve holder of the world.
"The rising trade surplus is the major factor contributing to the forex
reserve boom," Cai said and pointed out that low prices of Chinese goods
contributed to the rising trade surplus.
"China needs forex reserve to avoid financial risks as the country's
dependence on foreign trade is going up," said Cai.
China's foreign trade has risen by more than 20 percent annually since 2002
while the ratio of foreign trade to GDP has risen from 30 percent to nearly 70
percent during the same period.
The country's trade surplus reached US$46.44 billion in the first quarter,
nearly double the US$23.3 billion surplus in the same period last year.
However, the rising trade surplus has brought increasing trade frictions
between China and its trade partners.
To balance, the country has lowered and is considering to further lower
export rebates on certain goods, ranging from steel to textile.
The trade surplus in March went down to US$6.87 billion, cracking the 10
billion mark for the first time since March 2006 and showing a downward trend.
"A large-scale forex reserve may backfire," said Cai. "It is the major reason
leading to the excess liquidity in China."
The central bank has to spend quantities of basic money to purchase foreign
exchange, thus aggravating the problem of surplus fluidity.
On the other hand, continuous growth of forex reserve has in fact increased
the pressure on appreciation of the Chinese currency, which in turn has exerted
greater pressure on value preservation of China's forex reserve.
It is estimated that by 2010, China's forex reserve will reach US$2.9
trillion. China thus plans to launch a state forex investment company.
The investment company will issue 200 billion to US$250 billion of
RMB-denominated bonds. Money to be raised will be firstly used as strategic
investment for energy enterprises like CNOOC, earlier reports said.
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