China’s foreign exchange reserves, the world’s largest, climbed to a record US$1.81 trillion at the end of last month as regulators failed to stem inflows of speculative capital from abroad.
Currency holdings rose 35.7 percent from a year earlier, the People’s Bank of China said yesterday on its Web site. The assets grew by US$126.6 billion from the end of March after a US$153.9 billion gain, the biggest on record, in the first quarter.
Chinese regulators are adding controls this month to limit “hot money” inflows from investors who are betting that the yuan will continue to appreciate after 25 straight monthly gains. The trade surplus, foreign direct investment and speculative capital have flooded the world’s fourth-biggest economy with cash, threatening to stoke inflation that rose to a 12-year high in February.
“A huge amount of money is coming into China and betting on the Chinese currency,” said Dwyfor Evans, an economist at State Street Global Markets in Hong Kong. “This is creating an inflation impact and has become a big worry for policymakers.”
The yuan has climbed against the US dollar every month since May 2006.
Speculative inflows may have reached more than US$200 billion in the first five months, according to Michael Pettis, a finance professor at Peking University.
The extra cash is limiting the options of policymakers. The central bank has kept interest rates unchanged this year after six increases last year on concern that higher rates would only attract more money from abroad. Instead, it has quickened the yuan’s gains versus the dollar to double last year’s pace and ordered banks to set aside a record 17.5 percent of deposits as reserves.
More increases in the reserve requirement are likely and the central bank will also keep selling bills to soak up cash, Wang Tao, a Beijing-based economist with UBS AG, said in a July 2 report predicting “continued rapid accumulation of foreign-exchange reserves” this year.
The State Administration of Foreign Exchange, China’s currency regulator, said this month it would inspect exporter foreign-exchange settlements starting from yesterday to try to prevent sham transactions letting speculative capital in.
China is also drafting regulations to control cross-border payments for services, with the same aim, according to an official at the regulator, who wouldn’t be identified.
Besides inflow of money, the currency reserves are swelled by returns on investments and a US dollar slump that increases the value of holdings in other currencies.
The government last year set up an investment arm, China Investment Corp (中國投資), to invest some of the money for bigger returns.
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