Date
17 December 2017
Excessive foreign exchange reserves will increase domestic money supply and create potential domestic inflation pressure, economists say. Photo: Bloomberg
Excessive foreign exchange reserves will increase domestic money supply and create potential domestic inflation pressure, economists say. Photo: Bloomberg

Rapid forex reserves growth fuels policy fears

China’s rapid accumulation of foreign exchange reserves is making it more difficult for policy-makers to steer the economy, China Daily reported Thursday, citing analysts and foreign exchange regulators.

“The excessively large foreign exchange reserves increase domestic money supply and create potential domestic inflation pressure,” said Huang Guobo, chief economist of the State Administration of Foreign Exchange.

“They also put more pressure on the central bank to raise reserve requirement ratios and sterilize [inflows],” he added.

The government has vowed to keep reserves at a “reasonable” level, the report quoted SAFE officials as saying.

Foreign currency reserves account for more than 80 percent of the central bank’s assets, leading to an asset-liability mismatch that generates foreign exchange risks, Huang said.

Reserves reached US$3.95 trillion at the end of March, surging from US$3.82 trillion at the end of 2013, official data showed. The increase reflected continued trade surpluses and steady inflows of capital, the report said.

Exports rose 7 percent to US$195.47 billion in May from a year earlier. 

The People’s Bank of China had been purchasing foreign currency, partly to control the rise in the value of the the renminbi.

Xu Hongcai, a senior economist with the China Center for International Economic Exchanges, urged officials to focus on balancing the country’s international payments so that reserves won’t get even bigger.

He said US$1 trillion would be enough for the nation’s foreign exchange reserves.

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CG

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