Mainland forex reserves rise least in 2 years
The mainland's foreign exchange reserves grew at their slowest in more than two years last month, smothering widespread fears that record inflows of hot money betting on the appreciation of the yuan are feeding inflation.
The increase of just US$11.9 billion in June, the smallest monthly accumulation of foreign capital since February 2006, appeared to fly in the face of a government consensus that speculative inflows remain too high and need to be tightly controlled.
But some analysts said hot money continued to flow into the country. It was simply being masked by a government directive that now required banks to set aside higher reserves in US dollars, they said.
The mainland's huge pot of foreign cash rose by US$126.6 billion from the end of March to US$1.81 trillion at the end of last month, up 35.7 per cent from June last year. That followed a gain of US$153.9 billion in the first quarter of this year, the biggest on record.
But last month's foreign exchange reserve increase was far less than the combined total of the trade surplus and foreign direct investment, which together made up about US$31 billion of foreign cash inflows. This raised initial speculation that there was a net capital outflow last month.
By comparison, April and May saw huge capital inflows amounting to US$74.5 billion and US$40.3 billion respectively, significantly higher than official trade and investment inflows, heightening concern about the impact of currency speculation on the economy.
Beijing launched a crackdown on capital inflows this month on fears foreign capital was stoking inflation by pumping up money supply and preventing the central bank from raising interest rates.
Analysts said the new figures were puzzling but were evidence that speculative inflows had neither slowed nor reversed. 'June's figures suggest we can crank down the alarm dial a notch. But inflows of hot money are still high and it is too early to say they are stabilising,' said Ben Simpfendorfer at Royal Bank of Scotland.
With the yuan continuing to gain against the US dollar and mainland interest rates still attractively high by international standards, there is no obvious reason for investors to pull money out of the country, especially in a deteriorating global investment environment. The yuan has appreciated 6.74 per cent against the dollar so far this year.
The true explanation behind the apparent drop in capital inflows was that the central bank had shifted a large chunk of foreign exchange to commercial lenders, which meant that it no longer showed up in the official reserves, said Logan Wright, an analyst at Stone and McCarthy Research Associates in Beijing.
Since August last year, an unspecified number of banks have been ordered to pay for increases in their reserve requirements in dollars.
The sharp drop in the pace of foreign exchange growth likely reflected the impact of a 100 basis points rise in banks' reserve requirements last month, Mr Wright said.
'We estimate that banks holding about 70 per cent of the deposits in the banking system were forced to pay for these reserve requirement rises in foreign currency, which likely reduced headline foreign exchange reserve levels by US$40 billion to US$45 billion,' he said.
That means China's foreign exchange reserves grew between US$52 billion and US$57 billion, in line with accelerating capital inflows in the first half of the year, he said.
