China on track to exceed Japan reserves
(Financial Times)
Updated: 2006-01-16 13:57

http://news.ft.com/cms/s/2c1b706a-8635-11da-bee0-0000779e2340.html

China's foreign exchange re-serves grew nearly $50bn in the last quarter of 2005 to reach $819bn, putting its reserves on track to surpass Japan this year as the world's largest.

The increase of $209bn (？72bn, ￡117bn) in China's reserves last year, slightly higher than the $207bn rise in 2004, came as a soaring trade surplus offset a decline in inflows of speculative capital from investors betting on a revaluation of the renminbi.

China is now on course to accumulate more than $1,000bn in foreign exchange by the end of this year - a total that would surpass Japan, which had $847bn in reserves at the end of December. With China's foreign direct investment stable in 2005 at $60bn, the same amount as in 2004, the largest stimulus to the reserves came from its swelling trade surplus, which more than tripled to $102bn last year.

In 2004, the fastest-growing source of foreign exchange for China was "credit transactions" - offshore US dollar borrowings by Chinese companies and foreign banks converted to renminbi on the mainland. Such borrowings were driven as much by hopes of windfall from a revaluation of the Chinese currency as by opportunities to invest in China's surging economy.

The government has tightened controls on offshore borrowings during the past year, especially by foreign banks. But speculation has been quelled by the way in which the central government and the People's Bank of China, the central bank, have handled international pressure for a renminbi revaluation during the past year. With a minor 2.1 per cent revaluation of the renminbi against the dollar in July and an even more modest appreciation in the currency since then, the PBoC has demonstrated it can resist US pressure for a quick rise and stick to its own policy.

Stephen Green, of Standard Chartered in Shanghai, said in a research note that higher US interest rates last year and a weaker local property market had also reduced inflows. In spite of this, capital inflows are expected to remain relatively high, especially as the trade surplus appears likely to remain substantial.

Strong inflows will maintain pressure on China to make its currency more flexible and responsive to market forces, while also keeping attention focused on how China invests its stockpile of foreign cash.

There has been repeated speculation that Beijing is likely to reduce its purchases of US dollar-denominated assets. Such speculation was fuelled this month when the State Administration of Foreign Exchange said one of its targets for 2006 was to "improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets". However, the PBoC said any suggestion China would sell down existing US dollar holdings was "definitely a misunderstanding"