Business | Markets
Growth of Chinese forex reserve slows
China's foreign exchange reserves, the biggest stockpile in the world, rose $126.7 billion in the second quarter to $1.81 trillion, but the pace of accumulation slowed dramatically in June, the central bank on Monday said.
- Agencies
- Published: 00:08 July 15, 2008
Beijing: China's foreign exchange reserves, the biggest stockpile in the world, rose $126.7 billion in the second quarter to $1.81 trillion, but the pace of accumulation slowed dramatically in June, the central bank on Monday said.
The People's Bank of China (PBOC) gave no reason why reserves rose just $11.9 billion last month, the smallest increase since February 2006, after leaping $40.3 billion in May and a record $75.5 billion in April.
Ma Xiaoping, an economist at HSBC in Beijing, suggested the slowdown was linked to a policy instituted by the PBOC last year, but not officially announced, requiring commercial banks to meet part or all of additional reserve requirements by lodging dollars, not yuan, at the central bank.
"This should be partly attributed to the one percentage point increase in the deposit requirement reserve - most of the additional reserves were paid in foreign exchange," she said.
The PBOC announced the aggressive rise in required reserves - usually it increases the ratio by half a point - on June 7.
When banks deposit dollars to fulfil their reserve requirements, they do not appear on the PBOC's balance sheet as official reserve assets but rather as foreign assets.
The appeal of this tactic for the PBOC is that, because it is not buying dollars for its own account, it does not have to print yuan in exchange, a step that boosts the money supply with the potential of stoking inflation.
One of many unanswered questions is who is bearing the exchange rate risk associated with an appreciating yuan, which has now gained more than 20 per cent against the dollar in three years.
Analysts assume the PBOC is taking on the risk and has assured commercial banks they will not take an exchange rate loss on the dollars they have been asked to deposit.
Another economist speculated that the slower build-up in reserves in June might reflect the belated accounting of a shift in reserves from the PBOC to China Investment Corp, the country's sovereign wealth fund, or other bookkeeping reasons.
"Still, a decline of this magnitude is surprising," he said.
Whatever is going on, economists said the small June increase was a welcome contrast to the outsized monthly gains so far this year.
These had far outstripped the sums of money flowing into China in the form of net export proceeds and foreign direct investment, leaving officials to fret that a tide of speculative "hot money" was flooding in to take advantage of China's relatively high interest rates and expectations of a rising yuan.
"It appeared that was becoming particularly problematic for the outlook for Chinese policy. If we are seeing a meaningful slowdown in FX reserve accumulation, then that clearly is a positive," said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong.
Adding in the first-quarter rise of $153.9 billion, China's official reserves have grown $280.6 billion so far this year compared with an increase of $461.9 billion in all of 2007.
China's reserves have now tripled since the end of 2004 as the PBOC, in order to hold down the yuan, has bought most of the foreign exchange flowing into the economy.
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