China’s foreign-exchange reserves exceeded $3 trillion for the first time, highlighting global imbalances that Group of 20 finance chiefs aim to tackle at meetings in Washington.
China’s currency holdings, the world’s biggest, swelled by $197 billion in the first quarter to $3.04 trillion, the central bank said yesterday. New loans were a more-than-estimated 679.4 billion yuan ($104 billion) in March, it said.
Premier Wen Jiabao’s policy of controlling the currency, along with trade surpluses and flows of capital into the fastest-growing major economy, have boosted the reserves by $1 trillion in two years. G-20 finance chiefs are seeking to agree on an early-warning system that can prevent the type of imbalances in trade and financial patterns that contributed to the 2007-09 crisis and recession.
“The continued substantial foreign-exchange reserve accumulation by China is a reflection of global imbalances,” said David Cohen, a Singapore-based economist at Action Economics who formerly worked for the U.S. Federal Reserve. China continues to “resist the pressure for faster appreciation of the yuan,” he said.
China will report first-quarter economic growth of 9.7 percent and March inflation of 5.4 percent, Jiang Guangce, a partner and fund manager at Congrong Investment Management Co., said yesterday, citing market speculation. Consumer prices rose 5.3 percent or 5.4 percent last month, according to a Phoenix Television report yesterday.
Those numbers, to be released today, would exceed economists’ median forecasts for 9.4 percent growth and 5.2 percent inflation.
‘Striking’ Increase
The currency holdings at the end of March compared with the $2.98 trillion estimate in a Bloomberg News survey of five economists and $2.85 trillion at the end of last year. M2 money supply rose 16.6 percent in March from a year earlier, exceeding analysts’ median estimate.
“Most striking at first sight is how fast the foreign- exchange reserves are rising,” said Mark Williams, a London- based economist for Capital Economics Ltd. “Chinese officials point to the first quarter’s trade deficit as evidence that there is less need for the renminbi rise, but the scale of reserve growth shows that the People’s Bank is still intervening very actively to keep the renminbi down.”
Yesterday’s reports underscore the challenges for China’s policy makers as they seek to stem inflation while at the same time preventing the yuan from soaring.
Stronger Yuan
The yuan closed at 6.5315 per dollar in Shanghai yesterday, about 4.5 percent higher than a year ago. By contrast, Singapore’s currency has climbed 10 percent in that time, according to Bloomberg data. That nation, which uses its exchange rate as the main monetary policy tool, yesterday said it will allow further appreciation after a greater-than-forecast acceleration in growth last quarter.
Any slowing in the pace of gross domestic product growth may help defuse risks of overheating and aid Wen’s campaign to contain consumer prices. The peak year-on-year gain in GDP growth during 2010 was 11.9 percent.
U.S. Federal Reserve Chairman Ben S. Bernanke is among those who have said that excess savings in Asia contributed to inflows of capital into the U.S. The investments helped hold down American borrowing costs, fueling a record mortgage boom that ended with a bust that sparked the global credit crisis.
Global Imbalances
At a February meeting in Paris, G-20 policy makers produced a list of criteria to use as yardsticks for when dangerous global imbalances are developing. The list included public debt and fiscal deficits, private debt and savings rates, trade balances and net investment-income flows and transfers.
Omitted at China’s behest were foreign-exchange reserves, a sign of the international disparities in spending and saving. In a signal that China may continue to resist the initiative, Li Yong, a vice finance minister, said guidelines could be used as a “political tool” against his nation by the G-20.
Reserves are also affected by exchange-rate swings. Strength in the euro against the dollar may have bolstered China’s holdings in the first quarter, by boosting the dollar- denominated value of assets held in the European currency.
Chinese officials are reining in lending to counter inflation after a record expansion of credit in 2009 and 2010, with the central bank boosting interest rates four times since mid-October and raising banks’ reserve requirements.
“We will further improve the yuan formation mechanism and increase yuan exchange-rate flexibility to eliminate monetary conditions that fuel inflation,” Wen told China’s cabinet this week.
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