Economy

Forex reserves reach record high

By Xin Zhiming (China Daily)
Updated: 2010-10-14 07:47

BEIJING - China's foreign exchange reserves, the world's largest, rose $194 billion in the third quarter to reach a record $2.65 trillion, which some foreign countries will likely use to pressure China to push forward a faster yuan appreciation, economists have said.

A woman looks at yuan and US dollar banknotes in Fuyang, Anhui province. [Photo/China Daily]

But the yuan's appreciation will cause the real value of the country's forex stockpiles to decline, so policymakers must strike a balance between the two positions, analysts have also said.

Related readings:  Forex regulator vows crackdown on 'hot money' inflows  Chinese banks' forex surplus hits $29.1b in Aug  Funds outstanding for forex up sharply in August  China starts diversifying forex reserves

The country's total reserves increased by 16.5 percent year-on-year, according to figures released by the People's Bank of China, the central bank, on Wednesday.

"The reserve build-up is set to lead to growing foreign pressure for a faster yuan revaluation," said Sun Shijian, an economist at Fudan University in Shanghai.

The US House of Representatives has passed a bill empowering the government to use punitive measures if other countries, including China, are found touse an undervalued currency to benefit their trade with the US.

The yuan has risen by 23 percent since July 2005 and by more than 2.2 percent since June 19, when China vowed to make the currency more flexible.

But the increase seems to fall short for some foreign governments which continue to urge China to let the yuan appreciate more and faster.

"Foreign exchange rates may not be directly linked to the value of the yuan," Zhuang Jian, senior economist of the Asian Development Bank (ADB) in China, said.

"China has increased imports, which would help rebalance its international payments.

High-ranking Chinese officials, such as central bank Vice-Governor Yi Gang, have vowed to reduce the ratio of the country's current account balance - the trade balance - over its GDP from the current 6 percent to 4 percent.

China's trade surplus narrowed to $16.9 billion- the smallest in five months - in September because import growth overtook export growth.

Sun also warned the yuan's appreciation will jeopardize the massive foreign exchange reserves' value, because it will cause them to shrink in terms of the dollar.

"The US is, in a sense, trying to reduce its debt to China through pressuring (China) to appreciate its currency," he said. "China must develop strategies to use its reserves more wisely."

The central bank also said Chinese banks extended a net of 595.5 billion yuan in new yuan-denominated loans in September, compared with August's 545 billion yuan.

"The pressure on policymakers from increasing liquidity remains," Zhuang from the ADB said.

China recently decided to temporarily raise reserve requirements, or the money commercial banks must keep in reserves, for six major lenders. The move indicates "policymakers' worries about liquidity", Sun said.

But the West's gloomy economic outlook is likely to limit further tightening by China, Moody's Analytics Senior Economist Matt Robinson said. "Weak job growth in the US and fiscal austerity in Europe will dampen near-term consumer demand for Chinese exports."

Moody's Analytics expects no sharp tightening by authorities in 2010's final months.

"The government will (instead) try to strike a balance between insulating China's economy from global weaknesses and keeping the domestic housing market from rebounding," Robinson said.