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Rising forex level seen as harmful to yuan's outlook

Rising forex level seen as harmful to yuan's outlook

With forex reserves rising dangerously close to the awesome US$1 trillion mark, China has issued an unusually high-level warning that they should not be permitted to grow much further.
The forex reserves, already the biggest in the world, hit US$954.5 billion at the end of July, up by nearly a third from one year earlier, state-controlled media said yesterday.
"We will take comprehensive measures to avoid further significant growth in the foreign exchange reserves," Vice President Zeng Qinghong said in an article published on the Web site of the official publication Study Times.
"The foreign exchange reserves have reflected China's growing economic power but on the other hand they have increased exchange rate risks and added upward pressure on the yuan," he said.
The latest figure translates into 30.3 percent growth from US$732.7 billion at the end of July 2005 and places China well on track to hold an unprecedented one trillion dollars in forex reserves by the end of the year.
Officials at Zeng's level do not normally comment on the level of the nation's foreign exchange holdings and the fact that he did must send a strong message, analysts said.
"From the statement by Zeng Qinghong, we can see it is a relatively urgent issue," said Shi Jianhuai from the China Center for Economic Research, a state-controlled think tank.
The speedy growth in China's forex reserves is one of the most visible symptoms of China's growing power as an exporting nation.
China's trade surplus soared over 40 percent year-on-year to US$14.6 billion in July, bringing the seven-month figure to US$76 billion, up nearly 52 percent from the same period in 2005.
The European Union, Japan and especially the United States claim that China keeps its currency deliberately weak so as to give its exporters an unfair advantage and insist that Beijing raise its value.
Since China revalued its currency by 2.1 percent in July 2005, ending the currency's decade-long peg to the dollar, but since then the yuan has risen only at a snails pace, sparking fresh demands for more rapid change.
China insists that it allow more flexibility in its forex management regime but also notes that it must move at its own pace rather than risk a major shock to its financial system.
However, some observers believe China could be forced into further change sooner rather than later as the massive fund inflows accompanying the trade surplus pose enormous policy challenges under a rigid exchange rate regime.
To keep a stable exchange rate, Beijing has to constantly buy up the dollars coming into the system with yuan which in turn boosts liquidity in the local financial markets. That liquidity in turn has to be soaked up via the sale of government debt instruments to avoid inflationary pressures but the question is how long this can continue.
"The rate of increase in forex reserves is relatively fast," said Qu Hongbing, chief China economist with HSBC based in Hong Kong.
"I believe the central government will undertake measures to slow down the speed."


Updated : 2021-10-25 05:25 GMT+08:00