Growing forex reserves further ammunition for yuan critics

PUBLISHED : Friday, 15 April, 2011, 12:00am
UPDATED : Friday, 15 April, 2011, 12:00am


China's foreign exchange reserves topped US$3 trillion for the first time last month, giving critics of its currency policy more ammunition as Group of 20 finance chiefs gather in Washington to address global economic imbalances.

Foreign reserves in the world's second-largest economy grew 24.4 per cent from a year ago to US$3.04 trillion at the end of March, the People's Bank of China said yesterday.

The rise in the first quarter was US$198 billion - about the same as in the previous two quarters - but the contribution from foreign capital inflows increased sharply. 'China's foreign exchange reserves could be a focus in the coming G20 meeting,' said Lu Ting, an economist with Bank of America-Merrill Lynch.

The G20, which convened yesterday in Washington, expects to make progress on guidelines for identifying economic imbalances this week, with a view to creating a list of problem countries.

China has long been blamed for undervaluing its yuan, with critics pointing to the swelling foreign exchange reserves as evidence that its currency policy is designed to help local exporters. The yuan was little changed yesterday at 6.5339 against the US dollar, about 4.5 per cent higher than a year ago.

Expectations of continued significant yuan appreciation and of higher interest rates on the mainland have caused hot money inflows to quicken in the first quarter, Lu said.

Loan data released by the central bank yesterday also pointed to growing inflationary pressure, with banks extending 679.4 billion yuan (HK$806.87 billion) in new localcurrency loans last month, and year-on-year credit growth of 17.9 per cent at the end of March.

Total new loans in the first quarter stood at 2.2 trillion yuan, about 30 per cent of the annual loan quota of between seven trillion yuan and 7.5 trillion yuan.

For the first time, the central bank has published 'total social financing data', which showed financing through bank loans, corporate debt and stock issuance dropped 7.1 per cent from a year ago to 4.19 trillion yuan in the first quarter.

Peng Wensheng, an economist with China International Capital Corp, said the data indicated that the country was tightening financing to rein in inflation. He forecast China would allow the yuan to appreciate 5 to 7 per cent against the greenback this year and would probably raise interest rates in the second quarter.

Little changed

The yuan was 6.5339 against the US dollar yesterday, about this much higher than a year ago: 4.5%