China’s foreign exchange reserves surged to a record level in December and new loans exceeded forecasts, raising stakes in Premier Wen Jiabao’s campaign to avert asset-price bubbles.
In comparison, India’s forex reserves jumped $741 million to $284.26 billion during the week ended January 8, according to the Reserve Bank of India.
Reserves in China rose 23 per cent to $2.4 trillion, the world’s largest, according to a People’s Bank of China (PBoC) statement on its website yesterday. Banks extended 379.8 billion yuan ($55.6 billion) of new loans, taking the annual total to an unprecedented 9.59 trillion yuan, PBoC reported.
Accelerating inflation might encourage the Chinese government to end the 18-month-old yuan peg to the dollar and allow a 3 per cent appreciation by year-end, said Isaac Meng, senior economist at BNP Paribas SA in Beijing.
Along with a stronger yuan, policy makers would have to follow up on their decision this week to raise the share of deposits banks must set aside as reserves, Meng said. The risk: surging lending growth and an influx of speculative capital from abroad may destabilise the world’s third-largest economy with bubbles from property to stock markets.
Wen’s cabinet pledged last week that regulators would step up monitoring of speculative funds after the biggest jump in property prices in 18 months in December.
More From This Section
Money supply
New lending was more than the 310-billion-yuan median estimate in a Bloomberg News survey and higher than in the previous two months. M2 money supply jumped 27.7 per cent in December from a year earlier, after a record 29.7 per cent gain in November.
For the full year 2009, foreign reserves climbed about $453 billion. The increase partly reflects China’s purchases of other currencies to prevent the yuan from appreciating. The effort, done to help exporters, has also resulted in the country becoming the largest creditor to the US, with $799 billion of Treasuries holdings.
“It’s a dilemma — you can’t keep the yuan where it is forever, yet allowing it to stoke speculation,” Brian Jackson, a Hong Kong-based strategist on emerging markets at Royal Bank of Canada, said before the statement. “The central bank will have to monitor and stem hot-money inflows very carefully.”
The yuan will strengthen about 5 per cent to 6.5 against the dollar by year-end, according to Jackson. The central bank has tightened policy this year by guiding bill yields higher and increasing banks’ required reserve ratio by half a percentage point starting January 18.
Yuan peg
Authorities have kept the yuan at 6.83 per dollar since July 2008, after allowing it to advance 21 per cent over three years.
Meng said PBOC would keep selling so-called sterilization bills to mop up cash and ratchet up banks’ reserve requirements by 2 percentage points by the end of June, to 18 per cent for bigger lenders.
The currency reserves jumped by $127 billion in the fourth quarter compared with $141 billion in the previous three months, as the trade surplus and foreign direct investment channeled in cash.
In December, direct investment from abroad more than doubled from a year earlier to $12.1 billion. The value of China’s euro and yen assets also affects the total.
Monthly increases
The data indicated foreign exchange reserves grew by about $55.7 billion in October, $60.5 billion in November and $10.4 billion in December. Gains in the dollar in December against the euro and yen pared the value of China’s holdings in those currencies, Royal Bank of Scotland Group Plc said.
“Inflows are likely to pick up in the first quarter,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.
The central bank has set a target of a ‘moderate’ loan expansion in 2010 to support economic growth, while stabilising prices and managing inflation expectations.
Property prices across 70 major cities climbed 7.8 per cent in December from a year earlier, a government report showed on January 14. A government report due next week will show gross domestic product increased 10.5 per cent in the fourth quarter from a year before.