Foreign reserve growth set to slow

PUBLISHED : Tuesday, 18 October, 2011, 12:00am
UPDATED : Tuesday, 18 October, 2011, 12:00am


Accumulation of foreign reserves on the mainland is expected to slow in the next few months as the trade surplus shrinks and investment in the world's second-largest economy cools.

Mainland financial institutions spent 247.3 billion yuan (HK$301.9 billion) buying foreign currencies last month, down 34 per cent from August, the People's Bank of China said yesterday.

The purchases, the lowest in two months, is a gauge of the amount of capital flowing into China, contributing to foreign exchange holdings.

Foreign reserves increased US$4.2 billion in the third quarter to US$3.2 trillion at the end of last month. This was the lowest single-quarter gain in the past decade, due to a US$60 billion reduction in reserves last month when an outflow of speculative funds and a skidding euro dented the stockpile.

'Investment into the mainland, whether in the form of direct investment in businesses, factories or speculative fund, is likely to decelerate in the coming months,' said Zhao Xijun, a finance professor at Renmin University in Beijing. 'Overseas investors will probably play safe by holding short-term domestic investments or other safe instruments.'

The trade surplus, another source of foreign reserves, is also expected to narrow. Barclays Capital forecast a trade surplus of US$162 billion this year, down from US$183 billion last year as external demand slackens amid world economic weakness.

Wang Tao, an economist at UBS Securities, said that if foreign exchange flows continued to be as depressed as last month, the central bank might need to inject more liquidity or even cut the required reserve ratio for commercial banks to maintain credit growth.

The slowing foreign reserve growth will be welcomed by the central government, which is under fire at home and abroad. Foreign governments point to the rising reserves as evidence of China's currency manipulation.

'September's slower pace of accumulation of foreign reserves, coupled with the narrowing of China's trade surplus, provides ample evidence to counter accusations that China's currency is heavily undervalued,' said Qu Hongbin, an economist at HSBC.

The People's Daily said the nation's foreign exchange manager faced limited diversification choices amid the global turmoil. The commentary said holding US treasuries was a realistic, though imperfect choice.

Reserves could not be used domestically because that would require printing more yuan, worsening inflation.

'Holding US treasuries is not the optimal solution, but a realistic choice under the current circumstances,' the paper said. 'We should push ahead with diversification appropriately and prudently.'

People posted their opinions about the article in a Sina website chat room. '[The government] only knows how to take from the people, not what to do for the people,' one internet user said.