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Chinese forex kitty aids US moves

(Agencies)
Updated: 2009-07-17 08:03

China's foreign exchange reserves are surging again, helping the Obama administration sell unprecedented amounts of debt as it seeks to drag the world's biggest economy out of a recession.

China will continue to use its huge foreign exchange reserves to buy dollar assets from the US, feel experts. An employee counting US dollar bills at a China Construction Bank office in Hai'an, Jiangsu province. [CFP]

Stockpiles of currency rose by a record $178 billion in the second quarter to top $2 trillion for the first time, the People's Bank of China said on Wednesday. The amount is close to two-thirds the size of China's economy and the equivalent of Italy's gross domestic product in 2006.

The cash holdings are growing as the central bank sells its currency, the yuan, to prevent an appreciation that would make the country's exports more expensive.

"People are talking about whether the Chinese may actually one day dump the dollar and Treasuries because of the problem in the US, but they are missing the point," said Stephen Jen, head of macroeconomics and currencies in London at BlueGold Capital LLP, which manages $1.1 billion. "The reserves are so big because China needs to keep the exchange rate stable for its exports. Therefore, they have to keep buying dollar assets."

The need to temper gains in its currency led China, the biggest overseas holder of Treasuries, to more than double its holdings of US government notes and bonds in three years to $763.5 billion in April, according to US Treasury data. The amount was equivalent to 38 percent of its reserves at the time.

"China's reserves will allow the US to run a higher fiscal deficit than other nations," said Bilal Hafeez, the London-based global head of currency strategy at Deutsche Bank AG.

"As the Chinese were becoming more vocal in regard to the need to move away from the US dollar, they were in actual fact buying more dollars than ever," said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd.

The dollar's share of global reserves increased to 65 percent in the first three months of this year, the most since 2007, according to the International Monetary Fund.

China is trying to reduce its reliance on the US currency in other ways. It signed 650 billion yuan of currency swaps since December with nations from Argentina to Belarus and is encouraging trading partners to use the yuan to settle cross-border trade.

The government is considering purchasing $50 billion of the IMF's bonds after the Group of 20 leaders on April 2 gave the international lender approval to boost its war chest by $500 billion.

China can afford that and more because its reserves will increase by more than $200 billion annually in coming years, said Wang Tao, an economist with UBS AG in Beijing. Increasing its strategic oil reserve to 90 days of imports, the nation's target for 2020, would take another $50 billion, Wang said.

China this week relaxed curbs on overseas investment by local businesses, allowing more funds to flow abroad starting Aug 1.

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