China reports big capital surplus
China yesterday reported a US$55 billion surplus on its capital and financial account for the first quarter, a sign that inflows from surging foreign investment and money brought in by commercial banks is putting increasing liquidity pressures on the world's third-biggest economy.
As speculation about a stronger yuan heightens, Beijing is also facing an uphill task to rein in hot money inflows, economists said.
It was the first time the State Administration of Foreign Exchange published quarterly data for the country's balance of international payments. The foreign-exchange regulator didn't provide comparative figures for the year-earlier period, but for the first half of 2009, the surplus on the capital and financial account was calculated at US$61 billion.
'Our latest research shows that hot money inflows have accelerated since late March due to an influx of capital betting on yuan appreciation and to take advantage of investment opportunities in the property and agricultural sectors,' said Li Youhuan, a professor at the Guangdong Academy of Social Sciences, a renowned researcher of fund flows.
'The speculative capital would prove a big threat to the local economy because of its aggressive way of playing the markets,' he said.
China attracted US$17.5 billion of foreign direct investment in the first quarter and Li said the remaining US$37.5 billion of surplus on the capital account included investments by China's sovereign wealth fund into domestic companies and foreign exchange turned in by commercial lenders as Beijing raised the banks' reserve requirement ratio twice in the first quarter.
The reserve requirement ratio is the percentage of total deposits that banks are required by the People's Bank of China to set aside and save with the central bank. Chinese banks can use foreign-exchange to increase their reserves.
'Without a full set of official figures, it is therefore impossible to work out a clear-cut figure for the hot money inflows,' Li said.
China's capital account surplus blew out from US$19 billion in 2008 to US$144.8 billion last year.
In the first quarter, the country's current-account surplus that covers trade in goods and services, declined 48 per cent to US$40.9 billon from a year ago.
The country's foreign reserve hit a record US$2.45 trillion at the end of March, the People's Bank of China said last month. For the first three months, the surpluses on both capital and current accounts added US$95.9 billion to the mainland's forex reserve.
'While the trade surplus is down, other drivers resulted in an additional US$95.9 billion going into the official reserve, generating appreciation pressure on the currency,' said Jinny Yan, an economist with Standard Chartered Bank.
Li Huiyong, an analyst with Shenyin & Wanguo Securities, predicted that the country could still post a trade surplus of US$100 billion this year despite slower export growth.
The SAFE said the publication of the quarterly data for international payments was aimed at enhancing transparency.
