China's Foreign Currency Reserves Surge to Almost $1 Trillion

By Nerys Avery and Nipa Piboontanasawat
Bloomberg
Oct. 13, 2006

Oct. 13 (Bloomberg) -- China's foreign-currency reserves surged to almost $1 trillion, the most ever held by a single country, driven by a record trade surplus that U.S. critics blame on an artificially undervalued yuan.

China had reserves of $988 billion at the end of September, the Beijing-based People's Bank of China said on its Web site today. That's 28.5 percent higher than a year earlier.

The reserves are growing at a rate of almost $30 million an hour, mostly driven by a gap between exports and imports that tripled to $102 billion last year. The government's policy of not allowing the yuan to strengthen to reflect demand for the currency keeps the nation's export prices low, further fuelling the trade surplus.

With a more flexible yuan, ``the currency would have appreciated and we wouldn't have seen this reserve accumulation,'' said Qing Wang, head of greater China research at Bank of America in Hong Kong and a former IMF official.

China's record holdings exceed the output of every economy in the world bar the eight largest. They reflect a global imbalance that's mirrored in the $805 billion U.S. current-account deficit, itself fueled by demand from the nation's consumers for cheap Chinese imports.

``The U.S. continues to live beyond its means and China's reserve accumulation is partly a result of that,'' said Barry Eichengreen, an economic historian at the University of California, Berkeley. ``Another year where no one does anything and somehow hopes the problem will solve itself will only set us up for a bigger fall.''

Currency Changes

China has recently shown signs it is responding to repeated calls by the finance ministers and central bankers of the U.S. and the other Group of Seven industrial nations to make its currency more flexible.

Premier Wen Jiabao has also acknowledged that reserves have caused a surge in the money supply that triggered a credit-fuelled investment boom the government is now trying to cool.

Central bank Governor Zhou Xiaochuan on Sept. 16 called on China's lenders to prepare for changes to the currency so they can better manage risk.

The government in April moved to loosen strict capital controls by letting companies and individuals invest outside China and allowing some outflow of funds.

``Too much money supply leads to excess capacity and this is what's happening in China,'' said Richard Duncan, head of investment strategy at ABN Amro Asset Management Ltd. in London and author of The Dollar Crisis. ``They've avoided a crisis thus far because they've been able to grow exports so rapidly, but this can't go on forever.''

To contact the reporter on this story: Nerys Avery at [email protected]