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China's forex reserves rise to record $2.13 trillion (07/15/09)

by Xinhua writer Liu Jie   

BEIJING, July 15 (Xinhua) -- China's foreign exchange reserves hit a new high of 2.13 trillion U.S. dollars at the end of June, adding to the belief that the world's third largest economy is on track for recovery, but also raising concerns about the influx of speculative capital betting on fast-ballooning asset prices.

China added new reserves of 185.6 billion U.S. dollars in the first half of the year, but that is about 95 billion U.S. dollars down on the same period a year ago, the People's Bank of China said on its website Wednesday.

The reserves growth picked up speed in the second quarter, with 178 billion U.S. dollars added, ending the decline in the first two months when monthly exports tumbled to near a decade low.

China's huge stockpiles, which expanded by 17.84 in the first half year on year, are more than double those of Japan, the second largest holding 1.02 trillion U.S. dollars.

SPECULATIVE CAPITAL

"The rapid growth in the second quarter was not only led by the still rising trade surplus, but also the confidence of overseas investors as they cash-in to buy Chinese assets," Zhuang Jian, senior economist with the Asian Development Bank (ADB), told Xinhua Wednesday.

Customs figures showed Chinese foreign trade shrank 23.5 percent to 946.12 billion U.S. dollars in the first half of the year, as the global financial crisis sapped demand for Chinese goods, and restricted China's imports after domestic industrial production shrank.

However, China still retained a trade surplus of 96.94 billion U.S. dollars in the first half, as imports dipped less than exports.

As the effects of the government's 4 trillion yuan stimulus package trickled down, China's economy showed signs of recovery, which is in part reflected in the bullish stock and property market.

Chinese shares have rallied more than 70 percent from the beginning of the year, posting the best performance in the world.

Property sales climbed 53 percent year on year to 1.58 trillion yuan as investors took advantage of low rates before inflationary trends started to gain ground.

Zhu Baoliang, an economist with the State Information Center, a government think-tank, said the rocketing asset prices and the speculative money inflow are "relevant".

"It is so dangerous that it will not only spur inflation, but also add pressure for the yuan's appreciation, which will exacerbate China's exports," he said.

Luxury home sales in China's big cities saw robust growth in the second quarter. An analyst said it is mainly due to increased purchase by overseas buyers.

Figures released by the Beijing Real Estate Transaction Website showed that among the capital's top 30 most expensive residential projects, 993 units were sold in the second quarter, doubling the transaction a year ago.

"The loosening up of the policy canceling limitations on home purchases by foreigners and compatriots from Hong Kong and Macao in Beijing contributed largely to the high-end residential sector," Wednesday's China Daily quoted Will Chen, deputy-managing director of CBRE, the world's largest commercial property services firm, as saying.

Zhuang Jian said China's property and equity markets have always been closely watched by international speculative fund holders. He believed that is the main reason behind the foreign reserve surge in the second quarter as he expected gross domestic product (GDP) will rebound to near eight percent in that period.

  U.S. DOLLAR DILEMMA

"The mounting deposit added difficulties for the Chinese authorities to manage, since its value is always exposed to consistent changes no matter of what composition," Chen Bingcai, researcher with the China National School of Administration, said to Xinhua Wednesday.

After the Federal Reserve adopted a quantitative easy monetary policy to spur U.S. economic revival, Chinese officials have expressed repeated concerns about the falling U.S. dollar rate which could hurt China's massive holding of U.S. dollar-denominated assets,

China reduced the holding of the U.S. treasury bills by 4.4 billion U.S. dollars in April, the first cut in a year. China has managed a total of 763.5 billion U.S. dollars by the end of April, according to the U.S. Department of Treasury.

Some experts suggested that China should buy commodities with the massive deposit to replenish China's oil and resources reserves. But others argued that China's cash-in will inevitably drive up the prices, which will in turn hurt the reserve value.

Zhang Bin, a researcher with the Chinese Academy of Social Sciences (CASS), told Xinhua that encouraging Chinese enterprises to invest more overseas may help diversify the reserve structure and offset financial risks.

China has signed loans-for-oil contracts worth 44 billion U.S. dollars with six countries including Russia, Brazil and Venezuela.

However, these measures could not eradicate the risks, said Yu Yongding, a researcher with the CASS, also a former central bank adviser.

"China should shift from the over-reliance on exports to domestic spending to achieve structural balance. In this way, the foreign reserve will not balloon," said Yu.

AMPLE LIQUIDITY

The central bank also said 7.37 trillion yuan of new bank loans were extended in the first half of the year, 4.92 trillion yuan more than in the same period a year ago, to echo the moderately eased monetary policy to support the economic revival.

Credits to non-financial businesses were 6.31 trillion yuan in the first half, up 4.32 trillion yuan year on year. Of the total, 1.32 trillion yuan were short-term loans, and 3.18 trillion yuan were mid-and-long-term loans. Bill financing was 1.71 trillion yuan.

In June, 1.53 trillion yuan of loans were issued, the second highest monthly figure this year.

The broad measure of money supply (M2), which covers cash in circulation and all deposits, rose 28.46 percent year on year to 56.89 trillion yuan by the end of June.

The narrow measure of money supply, M1 (cash in circulation plus corporate current deposits), was up 24.79 percent to 19.32 trillion yuan.

Zhuang Jian said he expected a monetary policy "fine tuning" in the second half of the year, to prevent excess liquidity flooding and pushing up inflation.

"A transformation from deflation to inflation could happen overnight considering the complex economic climate. Therefore the policy should be set prior to the changes taking place," he said.

Chinese Premier Wen Jiabao said on many occasions in the past two months that China will stick to the proactive fiscal policy and moderately easy monetary policy to maintain growth.

China will release the GDP for second quarter Thursday. Analysts expected that growth of nearly eight percent is possible.

 

 


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