World-Record China Reserves Pass $3 Trillion in Policy Challenge for G-20

China’s foreign-exchange reserves exceeded $3 trillion for the first time and bank lending accelerated, signaling an escalation in the global economic imbalances that Group of 20 finance chiefs are trying to rein in.

China’s currency holdings, the world’s biggest, swelled by $197 billion in the first quarter, the nation’s central bank said on its website. A separate report showed new loans were a more-than-estimated 679.4 billion yuan ($104 billion) in March.

Premier Wen Jiabao’s policy of restraining gains in the yuan, along with trade surpluses and flows of capital into the fastest-growing major economy have boosted the reserves by $1 trillion in two years. The G-20, gathering tonight in Washington, is seeking to agree on an early warning system that can prevent the type of imbalances in trade and financial patterns that contributed to the 2007-09 global credit crisis.

“Most striking at first sight is how fast the foreign- exchange reserves are rising,” said Mark Williams, a London- based economist for Capital Economics Ltd. “Chinese officials point to the first quarter’s trade deficit as evidence that there is less need for the renminbi rise, but the scale of reserve growth shows that the People’s Bank is still intervening very actively to keep the renminbi down.”

Exceeding Forecasts

The currency holdings at the end of March compared with the $2.98 trillion estimate in a Bloomberg News survey of five economists and $2.85 trillion at the end of last year. M2 money supply rose 16.6 percent from a year earlier, exceeding analysts’ median estimate.

Today’s reports underscore the challenges for China’s policy makers as they seek to stem inflation while at the same time preventing the yuan from soaring. Consumer prices rose 5.3 percent or 5.4 percent last month, the most since July 2008, according to a Phoenix Television report in Hong Kong ahead of government figures scheduled for release tomorrow.

The yuan was little changed today at 6.5339 per dollar, about 4.5 percent higher than a year ago. By contrast, Singapore’s currency has climbed 10 percent in that time. That nation, which uses its exchange rate as the main monetary policy tool, today said it will allow further appreciation after a greater-than-forecast acceleration in growth last quarter.

GDP Growth

Government figures tomorrow may show China’s gross domestic product expanded at a slower pace in the first three months of the year, which may help defuse the risks of overheating and help Wen’s campaign to contain consumer prices. The expansion probably eased to 9.4 percent, according to the median estimate, compared with a peak year-on-year gain of 11.9 percent last year.

U.S. Federal Reserve Chairman Ben S. Bernanke is among those who have said that excess savings in Asia contributed to inflows of capital into the U.S. The investments helped hold down American borrowing costs, fueling a record mortgage boom that ended with a bust that sparked the global credit crisis.

At a February meeting in Paris, G-20 policy makers produced a list of criteria to use as yardsticks for when dangerous global imbalances are developing. The list included public debt and fiscal deficits, private debt and savings rates, trade balances and net investment-income flows and transfers.

Omitted at China’s behest were foreign-exchange reserves, a sign of the international disparities in spending and saving. In a signal that China may continue to resist the initiative, Li Yong, a vice finance minister, said guidelines could be used as a “political tool” against his nation by the G-20.

Euro’s Impact

Reserves are also affected by exchange-rate swings. Strength in the euro against the dollar might have bolstered China’s holdings in the first quarter, by boosting the value of the dollar-denominated value of assets that are held in the European currency.

Chinese officials are reining in lending to counter inflation after a record expansion of credit in 2009 and 2010, with the central bank boosting interest rates four times since mid-October and raising banks’ reserve requirements.

“We will further improve the yuan formation mechanism and increase yuan exchange-rate flexibility to eliminate monetary conditions that fuel inflation,” Wen said in his speech to a State Council meeting yesterday.

--Zheng Lifei. Editors: Paul Panckhurst, Chris Anstey

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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