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Friday, April 11, 2008

China's Foreign Currency Reserves Soar 40% Year on Year

China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March, adding pressure on the government to prevent money inflows from fueling inflation already at an 11-year high. Currency holdings expanded 40 percent from a year earlier, according to data from the People's Bank of China today. The assets grew a record $153.9 billion from the end of December, after a $94.6 billion increase in the fourth quarter.

To tame liquidity, the central bank has pushed the required reserve ratio for lenders to a record 15.5 percent. China has held off raising interest rates after six increases last year as the U.S. Federal Reserve cuts borrowing costs.

The central bank today cited slower money-supply growth as evidence that its ``tight'' monetary policy is having an effect. M2, the broadest measure, grew 16.3 percent in March from a year earlier, the slowest pace since January 2007. M2 was up 17.5 percent year on year in February. Outstanding local-currency loans rose 14.8 percent from a year earlier, the central bank said. Lenders extended 283.4 billion yuan ($40.5 billion) of new loans in March, taking the total to 1.33 trillion yuan for the first quarter.Outstanding local-currency deposits climbed 17.4 percent from a year earlier, the central bank said.

A falling dollar contributes to the build-up of China's foreign reserves as the assets are quoted in the U.S. currency, according to UBS economist Jonathan Anderson. Anderson takes the view that:

"The onset of the credit crisis and the crumbling of the U.S. housing bubble precipitated a significant sell-off of the dollar. That has boosted the value of the assets that China holds in other currencies. A sizable portion, 35 percent to 40 percent of China's foreign-exchange reserves, is held in European and Japanese assets"

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