China's central bank spent 1.61 trillion yuan (US$195 billion) buying foreign currency last year to maintain the yuan's peg with the US dollar, a rise of 40 percent over 2003, state press reported yesterday.
The People's Bank of China also drained 669 billion yuan from the banking system via open-market operations last year, more than double the 282 billion yuan used in 2003, Xinhua news agency said, citing a central bank report.
"The central bank faces comparatively large pressure in the management of money flow and currency control," it said.
China keeps its currency pegged to the US unit in a very narrow trading bank of about 8.28 yuan, a level which trading partners, especially the US, say gives Chinese exports an unfair advantage.
The government is not only under political pressure to let its currency appreciate but the central bank is struggling to mop up the extra cash in the system flowing in on speculative bets that it will free up the peg.
China has resisted foreign pressure to loosen the yuan peg but has promised that it will move over time towards a more flexible exchange-rate regime.
Ballooning trade surpluses and years of foreign investment have flooded the financial system with cash and market players say the central bank has been virtually the only buyer of surplus hard currency such as the US dollar.
As a result, China's foreign reserves last year soared to a record US$609.9 billion from US$403.3 billion in 2003, with the increase equal to the total intervention amount.
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