CHINA> National
China sees 1st annual growth slowdown in forex reserve in 10 years
Updated: 2009-01-13 19:50

BEIJING - China's foreign exchange reserves increased 417.8 billion U.S. dollars in 2008, 44.1 billion U.S. dollars less than the increase in 2007, the People's Bank of China, the central bank, announced Tuesday.

This is the first time China has seen a decline in the growth of its foreign exchange reserves since 2000.

The forex reserve increased almost 45 billion U.S. dollars in the fourth quarter to 1.95 trillion U.S. dollars by the end of 2008, the central bank said in a report.

The reserve growth had been slowing in 2008. Statistics show that in 2007 the monthly reserve growth was 38.5 billion U.S. dollars on average. In the first half of 2008, the monthly growth averaged at 46.8 billion U.S. dollars and the figure dropped to 32.1 billion U.S. dollars in the third quarter and to more than 10 billion in the fourth quarter.

The marked slowdown was a result of a shrinking trade surplus and a possible slowing of "hot money" inflow, analysts said.

Professor Guo Tianyong of the Central University of Finance and Economics said expectations of a weaker yuan and extraction of capital from the Chinese market to ease capital supply pressure in the West were major factors leading to the decrease of forex reserves growth in the fourth quarter.

December saw a sharp rise in forex reserves as the Central Economic Work Conference in early December pledged to keep the renminbi stable based on a reasonable and balanced level, which reversed expectations for a weaker yuan, he said.

The monthly reserves for December increased by 61.3 billion U.S. dollars, 30 billion U.S. dollars more than the same month of 2007, according to the central bank.

China has been concerned about "hot money" brought into the country by businesses and individuals speculating on the continuous rise of the renminbi, worrying that such flows would create asset bubbles, fuel inflation, put further appreciation pressure on the currency and make the domestic financial system vulnerable.

With the deleveraging of financial markets in developed countries since the financial crisis broke out, hot money flowing into China began to dry up, said analysts.

The extraction of foreign capital from the Chinese market also resulted in a decrease of foreign direct investment (FDI), which also contributed to the slowdown of forex reserve growth, said Zhuang Jian, senior economist with the Asia Development Bank.

According to the Ministry of Commerce, China's FDI fell for four consecutive months from July 2008. The FDI dropped by 36.52 percent from a year earlier to 5.322 billion U.S. dollars in November.

The trade surplus growth also slowed in 2008, another factor leading to the slower rise in forex reserves.

According to the General Administration of Customs, China's trade surplus in 2008 reached 295.5 billion U.S. dollars, up 12.5 percent or 33.3 billion U.S. dollars from 2007, when the figure was 262.2 billion U.S. dollars with a year-on-year growth of 47.7 percent.

Zhuang Jian said the slowdown of China's forex reserves growth would be temporary and foreign capital would flow into China with the recovery of the world economy.

Zhuang said a forex reserve of 1.95 trillion U.S. dollars was still huge, which would be a good base for China to combat the global economic slowdown.

"The key for now is to use the huge reserves properly to protect the country from the impact of the world recession," he said.

Through December, the M2 -- a broad measure of money supply, which covers cash in circulation plus all deposits -- grew by 17.82 percent from a year earlier to 47.52 trillion yuan (6.96 trillion U.S. dollars).

The M2 growth rate was 3.02 percentage points higher than the previous month. The figure had fallen for six consecutive months.

The increase of money supply was a result of a looser monetary policy, said Peng Xingyun, a research member of the Institute of Finance and Banking, Chinese Academy of Social Sciences.

To boost the domestic economy amid worries over the deepening global financial crisis, China cut interest rates five times and reduced the deposit reserve ratio four times since September 2008.

Through December, the narrow measure of money supply, M1, was up 9.06 percent to 16.62 trillion yuan from a year earlier. The growth rate was 11.99 percentage points lower than the end of 2007 but much higher than the 6.8 percent growth by the end of November, according to the central bank.

"The increase of M1 reflects the expectation for the economic revival is warming up and enterprises are doing more business," said Peng.

The central bank report also said the country's financial system remained stable and loans increased reasonably for the whole of 2008.

Outstanding local currency loans were up 18.76 percent to 30.35 trillion yuan by the end of 2008. The growth rate was 2.66 percentage points higher than the end of 2007.

Outstanding local currency loans for December alone expanded by 771.8 billion yuan, 723.3 billion yuan more than the same month of 2007.

Peng said the increase in local currency loans was a response of financial institutions to the state policies of boosting the economy by expanding investment.

The government in November announced a 4-trillion-yuan stimulus package for the next two years.

The report said local-currency deposits were up 19.73 percent to 46.62trillion yuan, remaining at a high level.

"People are still unwilling to spend money because of lower confidence over the future economic situation," said Peng.

Local-currency transactions on the inter-bank market reached 11.76 trillion yuan in December. Average daily transactions were up to 511.2 billion yuan, up 25 percent year on year.