China’s Reserves Hit $3.4 Trillion
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China’s foreign currency reserves rose in the first quarter by $130 billion, reaching a record $3.4 trillion, approximately the size of Germany’s economy, as a result of massive capital inflows into the Chinese financial system.
Strong growth in foreign capital inflows marks a significant change from last year when money flowed out from China. The return of foreign funds accelerated the domestic lending, according to authorities in Beijing, with total new financing rising by 58 percent to 6.2 trillion yuan ($1 trillion) compared with the first three months of 2012.
China’s foreign currency reserves rose in the first quarter by $130 billion, reaching a record $3.4 trillion, approximately the size of Germany’s economy, as a result of massive capital inflows into the Chinese financial system.
Strong growth in foreign capital inflows marks a significant change from last year when money flowed out from China. The return of foreign funds accelerated the domestic lending, according to authorities in Beijing, with total new financing rising by 58 percent to 6.2 trillion yuan ($1 trillion) compared with the first three months of 2012.
The surge in credit also explains why Fitch this week trimmed China’s sovereign credit rating, the first such move by an international agency since 1999.
According to the London-based agency, it is worried that local governments and companies may have racked up too much debt.
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According to Fitch, China’s overall credit to GDP ratio surged to 198 percent at the end of last year, up from 125 percent at the end of 2008. “Credit has grown significantly faster than GDP since 2009,” Fitch said in a statement. “China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012.
“The rise in foreign exchange reserves is a very clear sign that capital inflows are back,” said Shen Jianguang, an economist with Mizuho Securities. “We will see more and more worries about this in the coming months because of the massive money printing in the US and Japan.”
Large bond-buying programmes by the U.S. Federal Reserve and the Bank of Japan are expanding the money supplies in both countries, generating cash that in part could wind up in emerging markets such as China.
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The Chinese central bank has stepped up liquidity withdrawals over the past two months to blunt the inflationary effect of the inflows.
Speaking to the Wall Street Journal, C. Fred Bergsten, senior fellow at the Peterson Institute of International Economic, said the substantial rise in the reserve was bound to add ammunition for U.S. lawmakers looking to penalise China for what it considers currency manipulation.
“If you think the Chinese current-account deficit should go to zero, then the yuan is undervalue by 15 to 20 percent,” Bergsten added. However, Chinese officials often say the value of the yuan is near parity, and does not need to strengthen much more or at all.
