China's reserves transcend $2 trillion
July 16, 2009
By Bloomberg Beijing
China's foreign exchange reserves, the world's biggest, topped $2 trillion (R16.5 trillion) for the first time as the nation's economic recovery prompted overseas investors to pump money into stocks and property.
The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People's Bank of China said yesterday on its website. That dwarfs a $7.7bn gain in the previous three months.
Shanghai's Composite index has surged 75 percent this year as Premier Wen Jiabao's stimulus package triggered unprecedented lending and surging investment. The increase in the reserves means China may buy more US treasuries as President Barack Obama's administration expands debt sales to fund a plan to revive growth.
"Hot money is flowing back," said Sherman Chan, an economist with Moody's Economy.com in Sydney. "China has the strongest prospects out of all major economies."
M2, the broadest measure of money supply, jumped a record 28.5 percent in June from a year earlier, the central bank said.
The central bank has used bill sales to push up money market rates for three weeks, seeking to tighten monetary policy without choking off a recovery as the surge in money supply increases the risk of asset bubbles, bad loans and resurgent inflation.
China's reserves are double those of Japan, the country with the second-biggest foreign currency holdings.
Lu Zhengwei, an economist at Industrial Bank in Shanghai, said: "The pace of foreign exchange inflows will accelerate in coming months as China's recovery attracts investors, and that will pose great challenges for monetary policy."
The trade surplus was $34.8bn in the second quarter and foreign direct investment was $21.2bn, leaving the bulk of the increase in the reserves unaccounted for. Investment returns and currency movements also affect their size.
Dariusz Kowalczyk, the chief investment strategist at SJS Markets in Hong Kong, saw speculative capital and higher valuations for non-dollar assets as the biggest factors.
Royal Bank of Scotland economist Ben Simpfendorfer in Hong Kong said speculative capital might have accounted for $50bn of the increase and gains by the euro for $35bn.
Yang Shengkun, a currency analyst in Beijing at China Citic Bank, said: "The capital inflows have driven up stock and property prices.
"Speculators are favouring China because the government's stimulus package is working quite well, which will help the country to be the first to recover globally."
China's foreign currency regulator said yesterday it would ease curbs on outflows of capital. The State Administration of Foreign Exchange (Safe) would expand the sources of capital Chinese could use to fund outbound spending and let companies send investment funds overseas without prior approval, it said yesterday.
"The rules are intended to give companies more room to develop overseas and reduce their pain" in adjusting growth models, said Liu Guangxi, an inspector at Safe's capital account department in Beijing.
China should "moderately" increase its holdings of US treasuries and purchases this year should not be lower than the total for last year, a People's Bank of China economist wrote in the China Securities Journal yesterday.
China's economic growth rebounded to 7.8 percent in the second quarter, according to a survey of economists. That number will be released today.
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