China’s Reserves Near $1 Trillion

October 15, 2006 at 10:09 pm (China, Economics)

One-trillion-dollar is a significant threshold for China’s foreign exchange reserves. Holding large amounts of reserves is not only a tremendous waste of resources, but also a heavy burden pushing China to raise currency value. It’s not strange that the country’s money supply will also increase, to keep in pace with the exchange reserve surge. The central bank has to trade dollars with yuan to balance currency value. The consequent money-supply generated by the tradeoff will fill the market with too much liquidity. The result is an inevitable inflation, which China is dieing to avoid. The only solution to this dilemma is the appreciation of the yuan.

 

From the Wall Street Journal:

China’s foreign-exchange reserves, the world’s largest, rose to just below $1 trillion at the end of September, while money-supply growth eased, according to data issued Friday.

As China continues to record large trade surpluses, analysts expect that foreign-exchange reserves will remain on a strong upward trend. At the same time, money-supply growth, while slightly slower than in the previous month, remains above the central bank’s target.

China’s foreign-exchange reserves totaled $987.9 billion at the end of last month, up 28.5% from a year earlier, the People’s Bank of China said.

The country’s broadest measure of money supply, M2, was up 16.8% from a year earlier at the end of September, the slowest growth rate so far this year, although still above the central bank’s full-year target of a 16% rise.

The central bank also said that new yuan-denominated loans totaled 2.76 trillion yuan ($349.3 billion) between January and September, up 798.7 billion yuan from a year earlier. That exceeded the country’s target of 2.5 trillion yuan for all of 2006.

The decline in M2 growth reflects the central bank’s tightening efforts in recent months, but the large and widening trade surplus in September implies that the foreign-exchange regime will continue to complicate monetary management, Merrill Lynch said in a note Friday.

China’s trade surplus in September totaled $15.3 billion, the second-largest ever.

Beijing has already taken a series of steps to slow the fast-growing economy, including raising the yuan-denominated reserve requirement ratio for most commercial banks twice this year, by half a percentage point each time.

It has also raised the benchmark one-year lending rate by 0.27 percentage point twice this year, and the one-year deposit rate by 0.27 percentage point in August.

“We do not take the softer money and credit data as indicating downside risks to growth, given the buoyant performance in the domestic equity market and lower market interest rates,” Goldman Sachs said in a note after the M2 data were issued.

However, liquidity within the banking system remains ample, as the monetary authority eased the speed of its sterilization operations, the investment bank added.

Meanwhile, the state-run China Securities Journal said Friday that China’s consumer prices rose 1.5% in September from a year earlier.

The rise in consumer prices, if correct, would be the fastest growth rate since June, when the index grew at the same pace. In August, consumer prices posted a 1.3% annual rise.

For the January-September period, consumer prices rose 1.3% from the same period of last year, the newspaper said. In the first three quarters of 2005, prices rose 1.8% from the prior year.

China’s National Bureau of Statistics is expected to issue official consumer-price data sometime in the coming weeks.

China’s trade surplus in the first nine months of this year reached $110 billion, already above the $102 billion surplus recorded for all of 2005.

Rapid inflows are likely to push China’s foreign-exchange reserves to $1 trillion in the next couple of months, Fan Gang, a member of the central bank’s monetary policy committee, said earlier this week.

Mr. Fan also said that a yearly 2% appreciation of the yuan is likely too small, but a large move isn’t appropriate.

On the over-the-counter market, the dollar was at 7.9000 yuan, up about 2% from the beginning of this year.

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1 Comment

  1. Additional Reading on China’s Foreign Exchange Reserves « Random Blog said,

    […] Following the preview post on China’s foreign exchange reserves, here is a comprehensive story on how China’s financial policy will shake the world economy. […]

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