The increase of China's foreign exchange reserves
law
Friday, 25 April 2008
In the first quarter of this year, China's foreign exchange reserves increased by154 billion US dollars, which is a record figure even by China's own impressive standards. However, there are some clues that this may underestimate the accumulation of foreign assets, which further indicates that the speed of "hot money" flowing into China is accelerating and it is becoming more and more difficult to depress the exchange rate.
In the first quarter of this year, China's foreign exchange reserves increased by US$ 654.38+054 billion, which is a record figure even by China's amazing growth standards. However, there are some indications that this may also underestimate the growth of foreign exchange assets, which further indicates that the speed of "hot money" pouring into China is accelerating and it is becoming more and more difficult to depress the exchange rate.
China has not released the full set of current account and capital account data for the first quarter. This makes the reserve figures the best representative. There are two reasons to think that it underestimates this position. First, the Bank of China is transferring funds to China Investment Corporation (CIC), a fledgling sovereign wealth fund with $200 billion. The exact time is not clear, but economists estimate that as much as $ 1000 billion may be transferred to CIC in the first quarter.
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China has not released the complete data of current account and capital account in the first quarter of this year. Therefore, foreign exchange reserve data has become the best analytical substitute. There are two reasons why this data underestimates the current situation. First, the People's Bank of China (PB0C) is transferring funds to the newly established sovereign wealth fund China Investment Corporation. The exact time is uncertain, but economists estimate that as much as 654.38 billion US dollars may be transferred to CIC in the first quarter. The total capital of CIC is $200 billion.
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Secondly, the accounts of the Bank of China provide some clues that more foreign exchange reserves are being deposited in commercial banks. "Other foreign assets", an item in the central bank's account, has hardly changed for four years and began to rise in August last year. Anecdotal evidence shows that commercial banks may be meeting the reserve requirements of the central bank by accumulating foreign exchange. Si Tong & McCarthy estimates that the 75% increase in the reserve requirement ratio may be denominated in US dollars. On this basis, the increase in reserves in 1 month and March means that foreign assets will further increase by about $42.5 billion in the first quarter.
Secondly, the account of China People's Bank provides some clues, that is, the extra foreign exchange has been placed in commercial banks. The "other foreign assets" in the central bank's account have hardly changed for four years, but they have been rising since last August. Anecdotal evidence shows that commercial banks may be accumulating foreign currency to meet the requirements of the central bank's deposit reserve ratio. Si Tong & McCarthy estimates that 75% of the increase in deposit reserve may be in the form of US dollars. On this basis, the reserve ratio was raised in June 5438+ 10 and March this year, which means that about 42.5 billion US dollars of foreign exchange assets have been accumulated in the first quarter of this year.
There are other complicated factors. For example, it is not clear how much market-marked income is included in the foreign exchange reserve data. But in a word, the actual accumulation rate of foreign exchange reserves in the first quarter may be as high as 1000 billion US dollars, which is higher than the published figure. There is reason to be afraid of this. The increasing inflow of hot money (mainly betting on the appreciation of the renminbi) shows that Beijing's capital controls are inadequate. Brad Setser, an economist, estimates that China's debt to the United States is equivalent to one-third of China's GDP. It is a question how long China can maintain its ability to accumulate foreign assets to absorb capital inflows.
There are other complicated factors. For example, it is not clear how much increase in foreign exchange reserves is included in the data. But in short, the actual increase in foreign exchange reserves in the first quarter of this year may be as much as $654.38+000 billion higher than the published figure. People have reason to be worried about this. The accelerated inflow of hot money shows that China's capital control is not enough. These hot money are mainly bets on RMB appreciation. Economist Brad? Ceste estimates that China's foreign exchange reserves have accounted for about one-third of China's gross domestic product (GDP). It is doubtful how long China can persist in accumulating foreign assets to absorb capital inflows.