China’s foreign-exchange reserves climbed by a record in the fourth quarter and lending exceeded the government’s full-year target, increasing pressure on the central bank to tighten policies to rein in liquidity and inflation.
The currency holdings, reported by the Chinese central bank on its Web site yesterday, increased by US$199 billion in the last three months of last year to US$2.85 trillion, the biggest quarterly gain since Bloomberg data began in 1996.
Full-year yuan-denominated lending of 7.95 trillion yuan (US$1.2 trillion) compared with a government target of 7.5 trillion yuan.
The People’s Bank of China (PBC) may need to raise benchmark interest rates and bank reserve requirements, and allow faster yuan appreciation, economists from Standard Chartered PLC and Credit Agricole CIB said.
Policymakers may also experiment with more ways of encouraging outflows of capital, after expanding a program for exporters to park revenue overseas and letting some citizens invest directly abroad.
“All eyes are going to be on what new policies the central bank can bring to the table and watch what use they make of the differentiated reserve requirement, which is a more targeted approach to dealing with excess liquidity,” said Jinny Yan (嚴瑾), a Shanghai-based economist at Standard Chartered.
“But there’s still going to be a lot of excess liquidity in the market in the first half of the year,” she said.
Yan forecasts three interest rate increases this year with the first one coming this quarter.
China’s benchmark stock index rose 0.2 percent at 1:50pm yesterday. The Shanghai Composite Index has lost 13 percent in the past year, on concern that the government may tighten policies further, according to Bloomberg data.
The yuan advanced the most in almost two weeks on speculation the central bank will allow the currency to appreciate ahead of Chinese President Hu Jintao’s (胡錦濤) visit to the US next week. The Chinese currency climbed 0.20 percent to 6.6244 per US dollar, the biggest gain since Dec. 30 as of 1:11pm in Shanghai, according to the China Foreign Exchange Trade System.
Gains in China’s currency holdings underscore global economic imbalances and claims that the yuan is undervalued, topics US President Barack Obama has put on the agenda for his Jan. 19 meeting with Hu in Washington. The yuan has climbed about 3 percent against the dollar since officials scrapped in June a peg that had been in place since the global financial crisis.
China will further increase the currency’s flexibility this year to cut the trade surplus and reduce inflationary pressure, PBC Deputy Governor Yi Gang (易綱) said in a commentary published in the official China Forex magazine yesterday.
The data released yesterday “points to rising price pressures due to fast expansion in monetary aggregates,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole. “Liquidity in the banking system will be more than abundant and the central bank needs to tighten more aggressively.”
Kowalczyk estimates banks’ reserve requirement ratio will be raised by a total of 150 basis points and interest rates to rise 50 basis points before the end of June.
The amount of cash in the economy could surge this quarter as banks front-load their new loans and central bank bills mature. The PBC will have 1.2 trillion yuan of bills issued through open-market operations falling due in the first quarter and 869 billion yuan in the second quarter, Kowalczyk said.
Yan forecast new lending this month could amount to 1 trillion yuan while Goldman Sachs Group Inc estimates the figure could be even higher.
China’s four biggest banks may need to limit the growth in overall yuan lending to about 14 percent this year to avoid being punished under this new system, three people with knowledge of the matter said yesterday. Outstanding local-currency credit rose 19.9 percent last year.
PBC Governor Zhou Xiaochuan (周小川) raised banks’ reserve ratio six times last year, boosted interest rates twice in the fourth quarter and cracked down on property speculation after record lending helped the economy recover from the global financial crisis.
The shift to a “prudent” monetary policy and “normalization” of monetary conditions this year may be more difficult. Continued capital inflows will boost domestic liquidity as the central bank exchanges foreign currency with yuan to meet its goal of maintaining a “stable” yuan.
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