Pol­icy fears mount as FX re­serves in­crease

China Daily (Canada) - - BUSINESS - By GAO CHANGXIN and XIE YUE in Shang­hai

China’s rapid ac­cu­mu­la­tion of for­eign ex­change re­serves is leading to dif­fi­cul­ties in steer­ing eco­nomic pol­icy, an­a­lysts and of­fi­cials with the for­eign ex­change reg­u­la­tor said on Thurs­day.

The na­tion will keep re­serves at a “rea­son­able” level, of­fi­cials of the State Ad­min­is­tra­tion of For­eign Ex­change said in an on­line in­ter­view.

“The ex­ces­sively large for­eign ex­change re­serves in­crease do­mes­tic money sup­ply and cre­ate po­ten­tial do­mes­tic in­fla­tion pres­sure,” said Huang Guobo, chief econ­o­mist of the SAFE. “They also put more pres­sure on the cen­tral bank to raise re­serve re­quire­ment ra­tios and ster­il­ize (in­flows).”

For­eign cur­rency re­serves ac­count for more than 80 per­cent of the cen­tral bank’s as­sets, leading to an as­set-li­a­bil­ity mis­match that gen­er­ates for­eign ex­change risks, Huang said.

Re­serves reached $3.95 tril­lion at the end of March, hav­ing surged from $3.82 tril­lion at the end of 2013, of­fi­cial data re­leased in April showed. The in­crease re­flected con­tin­ued trade sur­pluses and steady in­flows of cap­i­tal.

A rise in cap­i­tal in­flows and for­eign di­rect in­vest­ment last year forced the People’s Bank of China to pur­chase for­eign cur­rency, partly to stop the yuan from ap­pre­ci­at­ing. China’s ex­ports rose 7 per­cent year-on-year to $195.47 bil­lion in­May.

XuHong­cai, a se­nior econ­o­mist with the China Cen­ter for In­ter­na­tional Eco­nomic Ex­changes, said he be­lieved that $1 tril­lion would be suf­fi­cient for the na­tion’s for­eign ex­change re­serve.

Heurged­of­fi­cial­sto­fo­cu­son bal­anc­ing the coun­try’s in­ter­na­tional pay­ments so that re­serveswon’t get even big­ger.

“The fact that se­nior lead­ers ac­knowl­edge that the coun­try’s for­eign ex­chan­g­ere­serves are too big marks a his­toric change. Pre­vi­ously, many people be­lieved that ‘big­ger was bet­ter’when­it­cameto for­eign re­serves,” saidXu.

Guan Tao, head of the SAFE’s in­ter­na­tional pay­ments di­vi­sion, said that the pace at which re­serves build up will slow as the coun­try seeks to re­duce its trade im­bal­ances and curb hot money in­flows.

As a per­cent­age of GDP, China’s trade sur­plus fell to 2 per­cent last year from 10.1 per­cent in 2007, Guan said.

In­creased two-way yuan vo­latil­ity since Fe­bru­ary has helped curb ar­bi­trage ac­tiv­i­ties, be­cause it has pro­duced di­ver­gent­mar­ket view­son­the yuan’s di­rec­tion, Guan said.

“Two-way vo­latil­ity has oc­curred as the mar­ket be­lieves the yuan ex­change rate has ba­si­cally reached a bal­anced and rea­son­able level, which lim­its risk-free ar­bi­trage ac­tiv­i­ties,” Guan said.

This week, the yuan has gained about 0.4 per­cent against the dol­lar.

From Fri­day to Tues­day, the yuan strength­ened 257 ba­sis points against the dol­lar, mea­sured by its cen­tral par­ity rate, the largest three­day move since April 2013, ac­cord­ing to a re­search note from HSBCHold­ings Plc.

The PBOC is send­ing a strong mes­sage to the mar­ket that the yuan will ex­hibit in­creased two-way vo­latil­ity. The tim­ing for re-in­ject­ing vo­latil­ity is also a nod to ten­ta­tively sta­bi­liz­ing eco­nomic con­di­tions, as in­di­cated by May ex­ports, ac­cord­ing to Wang Ju, a se­nior for­eign ex­change strate­gist at HSBC.

The cen­tral bank’s ac­tions are in line with its fo­cus on for­eign ex­change pol­icy this year, in­duc­ing more vo­latil­ity in the ex­change rate to dis­cour­age one-way po­si­tion­ing, whether pos­i­tive or neg­a­tive, Wang said.

Pre­mier Li Ke­qiang said in May that the re­serves had be­come a headache whose con­tin­ued rise could stoke in­fla­tion in the long term.

In­fla­tion as mea­sured by the con­sumer price in­dex edged up to a four-month high of 2.5 per­cent in­May but re­mained well within the govern­ment’s com­fort zone, giv­ing China am­ple room to step up tar­geted mea­sures to sup­port the slow­ing econ­omy.

The govern­ment is mak­ing such ef­forts, but top lead­ers have ruled out any large stim­u­lus, with the coun­try still cop­ing with the aftermath of a 4 tril­lion yuan ($640 bil­lion) stim­u­lus plan im­ple­mented dur­ing the 2008-09 global fi­nan­cial cri­sis, which took lo­cal gov­ern­ments deep into debt.

The SAFE re­it­er­ated plans to use some of the re­serves for out­bound in­vest­ment and to im­prove the way it man­ages the re­serves. Reuters con­trib­uted to this story. Con­tact the writ­ers at gaochangxin@ chi­nadaily.com.cn and xieyu@chi­nadaily.com.cn

FOR­EIGN EX­CHANGE RE­SERVES

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