CHINA MOVES TO EXPLAIN $136BN FOREX SURGE By Richard McGregor in Beijing
Tuesday, April 17, 2007
China has taken the unusual step of trying to explain the recent surge in its foreign exchange reserves after they rose by the equivalent of $1m a minute in the first quarter of this year, or by more than half the total increase of 2006.
The explanation yesterday by Wu Xiaoling, a deputy governor of the People's Bank of China, prompted a number of analysts to firm up their expectations that the central bank would introduce further monetary tightening measures.
Economists also expect first-quarter economic growth figures, due to be released on Thursday, to put more pressure on the PBoC. Goldman Sachs, in a note to investors, yesterday said it expected gross domestic product growth for the first quarter of 2007 to accelerate to 11.2 per cent, up from 10.4 per cent in the final three months of last year.
China has already increased six times in less than a year the amount it requires commercial banks to keep on deposit with the authorities, to control liquidity in the financial system. It has increased interest rates three times during the same period.
Beijing supports fast growth but has been increasingly worried about the political, environmental and structural economic impact of the current model, which is driven by high net exports and energy-intensive heavy industry.
Speaking at a seminar in Guangzhou, southern China, on Sunday, Ms Wu said the first-quarter rise in foreign exchange reserves of $135.7bn (�00bn, £68bn) to $1,202bn was caused by a number of factors beyond the sharp rise in the trade surplus, which had already been made public.
Ms Wu said the unwinding of swap agreements between the central banks and Chinese commercial lenders had resulted in foreign exchange coming back on to the PBoC's books.
Some of the funds raised in huge offshore initial public offerings by Chinese banks and other enterprises had also been brought back onshore, driven by the desire to take advantage of the rising renminbi.
