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��Home>>China Observer
Rapid growth in China's foreign reserves is rational
www.chinanews.cn 2005-01-21 16:16:59
Chinanews, Beijing, Jan. 19 (By Yulan) - "China's foreign reserves are
indeed somewhat high, but not by any big magnitude", said Zhou Xiaochuan,
governor of the People's Bank of China, in his response to a reporter at
the 2005 Caijing Magazine Leadership Forum on January 18. This was the
first time that a senior official at the central bank ever took a public
stand on the scale of China's foreign reserves.
According to the latest statistics, by the end of December 2004, China's
foreign reserves totaled US .9 billion, increasing by .7 billion, or
51.3%, from the previous year. During the fourth quarter, in particular,
reserves grew at an astonishing rate of US billion every month. Generally
speaking, a nation's foreign reserves consist of two parts. One is direct
purchase by the central bank; the other is the sum of profit/loss from
exchange rate fluctuations and interest income.
Euro and yen-denominated reserves account for about 30% of China's total
foreign reserves. These two currencies appreciated against the greenback
last year, which to some extent helped to raise the amount of foreign
reserves in terms of US dollars. According to Song Guoqing, a professor
of China's Center for Economic Research at Beijing University, the net
gain from the Euro's and the yen's appreciation accounted for 6% of the
total growth in reserves.
Another source of growth was the central bank's hedging activities. Yi
Xianrong from the Financial Research Institute of the China Academy of
Social Sciences pointed out that a majority of China's US dollar reserves
was US treasury bonds with an annual yield of 5%. Although the cost of
hedging excess dollar exposure in a structured currency portfolio might
cost three percent points of the bond yield, the central bank could still
make a gain on the remaining 2%. This gain also contributed significantly
to the sharp rise in reserves.
In addition, high expectation of RMB appreciation and interest rate hikes
prompted many debtors to prepay their RMB loans with US dollars,
generating more foreign currencies. Besides, overseas investors'
increasing interest in Chinese real estate also fattened up the reserves.
After taking the above factors into consideration, the proportion of hot
money in China's foreign exchange system would fall dramatically. The
Financial Research Institute of the China Academy of Social Sciences
seems to concur. According to the institute's recent calculations, hot
money, or money that does not involve actual trade, only accounts for a
few tens of billions of US dollar in China's newly added foreign reserves.
Therefore, the rapid growth of China's foreign reserves in 2004, rational
as a whole, is not as frightening as imagined by the outside world.
E-mail: zhangqinghua@chinanews.com.cn Tel: 8610-88387443 Fax:
8610-68327649
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