Friday, July 13, 2007

China’s forex rises to $1.33 trillion

by Vipin Agnihotri

In just one year, China’s foreign exchange reserves have increased by 41.6% reaching $1.33 trillion by last month end. In terms of statistic, a total of $266.3 billion have been added to the reserves in the first half of this year, which is $144bn more as compared to 2006.

In my opinion, a large-scale forex reserve may backfire. It is the major factor leading to the excess liquidity in China. According to experts, China’s soaring trade surplus is one of the major reasons contributing to the bulging forex reserves.

The increase in China’s foreign exchange reserves is a worrying sign for world economy, as China is expected to deploy a big part of it in financial markets all around the globe. Interestingly, it has come into the notice that more than seventy percent of China’s forex reserves are in US dollar-denominated assets, normally in relatively low-yielding Treasury bonds. This exposes China to a financial loss because of the steady dip of the US currency.

Not so long ago, the National Development and Reforms Commission in Beijing pointed out in public that the trade surplus would increase to $250-300 billion in 2007. This would mean quite an increase from the last year level of $177.5 billion.

To maximize returns, the Chinease government is working overtime to come up with a state-controlled investment firm, whose main responsibility will be to manage a fifth of the forex reserves. According to sources, the finance ministry is expected to soon issue 1.55 trillion yuan ($204bn) in bonds to fund the new investment firm.

 

 

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