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China's recent decrease in forex reserves considered good
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15:08, December 23, 2008

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It is a good phenomenon for China's mammoth foreign exchange reserves to diminish for the timebeing, some experts believed.

China's forex reserves peaked at 1.9 trillion U.S. dollars at the end of September, now they were below that figure, Tuesday's Shanghai Securities Journal quoted Cai Qiusheng, head of the foreign debts section under the capital-account management department of the State Administration of Foreign Exchange, as saying.

This was the first decline in China's forex reserves since the end of 2003.

Cai made the remarks at the 7th annual meeting of China's import and export enterprises held over the weekend. But Cai did not reveal in which month, October or November, the country's foreign reserves fell below the 1.9-trillion-dollar level, nor did he disclose the exact size of the forex reserves at present.

Central Bank data show that at the end of September, China's forex reserves stood at 1.9056 trillion U.S. dollars, a growth of 32.92 percent over the same period of last year. The reserves increased 377.3 billion dollars in the first nine months of this year, 10 billion dollars more than the year-earlier increment. The total increase included 21.4 billion dollars recorded in September, 3.6 billion dollars less than the increment for the same month of last year.

Qu Hongbin, chief economist with HSBC China operations, analyzed that since growth of China's exports and imports had slowed down, China's trade surplus kept increasing and that foreign direct investment (FDI) had been rising though at a slower pace. Therefore he considered trade and FDI were not the factors behind the forex reserves decrease.

Yuan Yuedong, a senior researcher with the global financial market department of the Bank of China, believed the reduction for the time being would not affect the Chinese economy adversely.

He attributed the reduction to the recent slower appreciation and a short-term depreciation of the Chinese currency, renminbi, against the U.S. dollar. He reckoned that possible increasing offshore investment by Chinese companies also contribute to the downward trend of the forex reserves. But he said data were not yet available to support the estimate.

Qu Hongbin believed the renminbi's depreciation against the euro, which was also a major currency in China's forex reserves, was another important factor.

An investment-bank analyst who declined to be named, said the forex reserves decrease might be related to capital withdrawal from China by some foreign institutions whose liquidity was tight.

But Commerce Minister Chen Deming said earlier that there was no sign of large amounts of capital flowing out of China and that China remained a good target for FDI.

To combat the impact from huge capital outflows in the short-term, the foreign exchange administration has taken a string of measures, including a registration management system for offshore equities under the corporate cargo trade accounts.


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