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Forex reserves reach record high

By Xin Zhiming (皇冠体育app Daily)
Updated: 2010-10-14 09:11

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

Huge stockpiles may spark more foreign calls for yuan appreciation

BEIJING - 皇冠体育app'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 皇冠体育app to push forward a faster yuan appreciation, economists have said.

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.

The country's total reserves increased by 16.5 percent year-on-year, according to figures released by the People's Bank of 皇冠体育app, 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 皇冠体育app, 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 皇冠体育app vowed to make the currency more flexible.

But the increase seems to fall short for some foreign governments which continue to urge 皇冠体育app 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 皇冠体育app, said.

"皇冠体育app 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.

皇冠体育app'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.

Related readings:    Macao's forex reserves reach $20.72b in July    皇冠体育app's forex reserves reaches $2.45t

"The US is, in a sense, trying to reduce its debt to 皇冠体育app through pressuring (皇冠体育app) to appreciate its currency," he said. "皇冠体育app 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.

皇冠体育app 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 皇冠体育app, 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 皇冠体育app's economy from global weaknesses and keeping the domestic housing market from rebounding," Robinson said.