Money inflow complicate China's efforts to tighten policy

09:41, January 13, 2011      

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China's foreign exchange reserves hit a record 2.8 trillion U.S. dollars in the fourth quarter of 2010. That certainly consolidates what was already the world's biggest stockpile, but it also shows that money streaming in from abroad will complicate efforts to tighten policy at home.

China's forex reserves climbed nearly 19 percent year on year in 2010. Experts say the forex increase reflects two things: a recovery in exports, but also the inflow of hot money. Some say the hot money inflows have impacted the appreciation of the yuan, and increases in domestic asset prices. These same factors could continue to push up forex reserves this year.

Zong Liang, General Manager of Strategy & Development Department, BOC said "I believe China's forex reserves will hit 3 trillion U.S. dollars very soon. The United States is adopting a quantitative easing policy, some European countries are suffering debt crises and they could also adopt a similar QE policy. So China's forex reserves are facing the risk of depreciation."

Wang Songqi, Deputy Director of Institute of Finance & Banking, CASS said "The central bank has to use hedging tools. It must adjust policies according to the situation, especially to avoid hot money inflows."

Experts suggest the central bank should further improve the exchange rate system, by allowing the rate reflect market supply and demand in a more timely fashion. They also suggest easing control on overseas investments, and encouraging Chinese investors to buy up on foreign currency.

Source: CNTV.cn
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