Forex reserves jump 39.2% to US$439.8b
By Zhang Dingmin
Updated: 2004-04-14 22:54

China's foreign exchange reserves continued to rapidly grow in the first quarter of this year as expectations for a revaluation of the local currency, or renminbi, persist.

The central People's Bank of China said Wednesday forex reserves jumped by 39.2 per cent on a year-on-year basis to US$439.8 billion by the end of last month.

The incremental reserves amounted to the equivalent of US$36.5 billion in the first quarter, US$6.9 billion more than the same period last year.

The bank did not explain the causes for the rapid increase, but analysts said most of the dollars should have flowed in under the capital account, which includes foreign direct investment and portfolio investments, or other illegitimate channels that are not recorded in official data. This occurred as foreign trade registered a deficit for the past quarter.

Considerable dollar amounts flowed into China last year through illegitimate channels in expectation that the renminbi, which some countries complain is undervalued, will appreciate soon, leading to aggregate dollar inflows far outstripping combined surpluses on capital and current accounts.

"That (the past quarter's rise) means the expectations for a renminbi appreciation are still strong," said Wang Yuanhong, a senior analyst with the State Information Centre.

"People still keep selling their dollar holdings to banks," he added.

In a bid to prevent speculative funds from entering China, the nation's foreign exchange authorities tightened rules earlier this year on individuals' sales of foreign currency to banks.

China's foreign exchange reserves are accumulated when the central bank purchases excess dollars from banks, which, under the nation's forex regime, buy dollars from individuals and businesses and sell to them in accordance with regulations.

China now still implements rigid foreign exchange controls, which mean that the central bank buys forex flowing into the country, raising the nation's forex reserves while releasing more base money into the market.

China's foreign trade, a major category of the current account, registered a US$8.43 billion deficit in the past three months as import growth, fuelled by robust domestic economic growth, outpaced exports.

Foreign direct investment came in at US$14 billion, up 7.5 per cent from a year earlier.

Meanwhile, a Xinhua report said the central bank also noted that the financial industry ran "smoothly" in the first quarter and vowed to keep in place a "stable" monetary policy.

China has successfully kept its currency stable, neglecting calls by some developed countries to appreciate the yuan, which they claimed would balance their trade with China. One US dollar was equal to 8.2771 yuan at end-March.

According to the latest report, the outstanding broad money supply M2, including money in circulation and all deposits, rose a year-on-year 19.1 per cent to 23.2 trillion yuan (US$2.8 trillion) at last month-end, while the narrow money M1 including money in circulation and demand deposits of enterprises grew 20.1 per cent to 8.6 trillion yuan (US$1.03 trillion).

"In general, money supply is fairly ample," the report said.

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