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Surging forex reserve marks inflow of international capital
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15:07, July 16, 2009

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Rapid growth of forex reserves might lead to RMB appreciation pressure

More foreign exchange reserves should be in private hands

The People's Bank of China (PBOC) announced on July 15 that the country's forex reserve reached 2.13 trillion USD at the end of June.

Amid the global financial crisis, China's forex reserve experienced a downturn in October 2008, which continued in January and February 2009. Starting from March this year, forex reserve began to grow again. Reserve increased by 177.87 billion USD in the second quarter, beating market expectations.

Ding Zhijie, deputy dean of the School of Banking and Finance at the University of International Business and Economics, explained that there are three key reasons behind the surge in forex reserve:

Firstly, China's foreign trade has generally maintained a favorable balance of trade, recording a cumulative surplus of 96.94 billion USD in the first six months of this year. Secondly, the value of non-US dollar assets in forex reserve has continued to increase due to the US dollar's depreciation. And thirdly, the optimistic outlook for China's overall economy has led to an inflow of international capital.

Generally speaking, forex reserve stems from trade surplus, foreign direct investment (FDI) and favorable balance of international payments. It is estimated that the combination of China's trade surplus and FDI in the second quarter stood at around 50 billion USD, far less than the newly-added 177.87 billion USD forex reserve, marking a notable inflow of capital.

Experts believe that it is necessary to keep a close watch on the trends of the world economy, international financial and forex markets, to adjust asset and currency portfolios in a timely and prudent manner, to ensure forex reserve's value preservation and appreciation.

In respect of future trends for forex reserve, Ding believed that since China's economy is quite likely to lead the world in recovery, the inflow of international capital will continue, maintaining the trend for a rapid growth in forex reserve. Meanwhile, because the depreciation of the US dollar was a main factor in the surge of forex reserve in the second quarter, and there is not much room for further depreciation, in the near future the growth rate of forex reserve will narrow compared to the second quarter.

By People's Daily Online


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