China forex reserves hit record | Pakistan Today

China forex reserves hit record

BEIJING – China said Tuesday its foreign exchange reserves hit a record high at the end of 2010, which is likely to fuel calls for a stronger yuan when President Hu Jintao visits Washington next week.
The increase in the forex holdings, already the world’s largest, highlighted imbalances in global trade and the challenge Beijing faces in stemming a flood of liquidity into the country.
China’s foreign exchange reserves expanded 18.7 percent from a year earlier to $2.847 trillion at the end of December, the central bank said in a statement, amid strong demand for Chinese exports. Analysts blame China’s huge trade surplus – $183.1 billion in 2010 – and its massive stimulus measures to combat the financial crisis for the flood of credit that has been fuelling inflation and property prices. Foreign exchange earned by Chinese exporters is changed for yuan with the central bank so it can control the value of the currency. The foreign exchange is added to China’s growing coffers, while the yuan flow into the economy.
China’s trade partners led by the United States say its tight grip on the yuan has led to a gross undervaluation of the local unit, giving exporters an unfair trade advantage. However the foreign currency stash gives China more leeway to make good on its pledge to buy bonds from European countries struggling under mountains of debt, analysts said. “From China’s perspective this is a win-win as it allows for diversification of its reserves while boosting market sentiment and hence prices on European sovereign debt,” said Alaistair Chan, an economist at Moody’s Analytics. “The only downside, of course, is the possibility of default.”
Other figures released showed new loans issued by state-owned banks in 2010 reached 7.95 trillion yuan ($1.2 trillion), beating Beijing’s full-year target of 7.5 trillion yuan but lower than the previous year’s explosion of lending. M2, the broadest measure of money washing around the world’s second-largest economy, reached 72.58 trillion yuan at the end of last year, up 19.7 percent from a year earlier.
Citigroup economist Ken Peng said the expansion of money supply last year showed further tightening measures will be needed in the coming months. After the Chinese Lunar New Year in early February, “we will almost definitely get higher reserve requirement ratios and higher interest rates,” Peng said. Ever fearful of inflation’s potential to spark social unrest, top leaders have been pulling on a variety of levers to rein in consumer prices and calm growing anxiety about soaring food costs and property values. In December, the central bank hiked interest rates for the second time in less than three months. It has also ordered lenders to keep more money in reserve, effectively limiting the amount of funds they can lend. Lending nearly doubled to 9.6 trillion yuan in 2009 as banks heeded the government’s urgent call to spur economic activity amid the global financial crisis.
With property prices continuing to rise, the government is also worried about the potential for a damaging bubble in the key sector, which could trigger an explosion in bad loans if real estate values were to fall sharply. An investigation last year by China’s land and resources ministry found “relatively large” risks in loans extended to local government financing vehicles, the official Xinhua news agency said Monday. Local governments are barred from borrowing directly from banks and many have set up financing units to fund infrastructure projects. State media said in July that 23 percent of the 7.66 trillion yuan that had been extended to local government financing vehicles at the time was in danger of turning sour. Other key data to be released later this month is expected to show the Chinese economy grew more than 10 percent in 2010 while the consumer price index may have reached 3.3 percent, state media said Tuesday, citing analysts.

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