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China Currency Reserves May Hit $2.5 Trillion, Stoking Tensions

U.S. Treasury Secretary Timothy Geithner says a stronger yuan would stimulate demand in China, which replaced Japan in the second quarter as the world’s second-largest economy. Photographer: Andrew Harrer/Bloomberg
U.S. Treasury Secretary Timothy Geithner says a stronger yuan would stimulate demand in China, which replaced Japan in the second quarter as the world’s second-largest economy. Photographer: Andrew Harrer/Bloomberg

Oct. 11 (Bloomberg) -- China’s foreign-exchange reserves, the world’s largest, may have climbed to a record $2.5 trillion, adding fuel to complaints that the nation’s currency intervention is undermining the global economic recovery.

Currency holdings rose about $48 billion in the third quarter, according to the median estimate in a Bloomberg News survey of eight economists. That would compare with a $7 billion gain in the previous three months, the smallest increase in 11 years. The central bank may release the number this week.

“The massive build-up of the foreign-exchange assets would only give more ammunition to those China critics who call for a rapid appreciation of the yuan,” said Tom Orlik, a Beijing-based analyst for Stone & McCarthy Research Associates, who formerly worked for the U.K. Treasury.

U.S. Treasury Secretary Timothy Geithner says a stronger yuan would stimulate demand in China, which replaced Japan in the second quarter as the world’s second-largest economy. Inflows of cash threaten to worsen inflation and asset-bubble risks in the Chinese economy and central bank Governor Zhou Xiaochuan said Oct. 8 that the nation needs to avoid the “shock therapy” of excessive appreciation.

China’s currency reserves topped $2 trillion in the first half of last year.

Yuan forwards surged to the strongest level in more than two years today on speculation the government will allow the currency to appreciate to meet the demands of trading partners.

Currency Swings

Twelve-month non-deliverable forwards jumped 0.7 percent to 6.4492 per dollar as of 9:58 a.m. in Hong Kong, reflecting bets the currency will strengthen 3.5 percent from the spot rate.

Weakness in the greenback, especially against the euro, probably accounted for the bulk of the third-quarter increase in the reserves by increasing the dollar value of assets held in other currencies, Standard Chartered Plc. said in an e-mail. That is a reversal from the second quarter, when the euro slumped against the dollar.

China’s trade surplus and inflows of cash from foreign direct investment also drive up the reserves.

Chinese banks may have extended 500 billion yuan ($75 billion) in new local-currency loans last month, a Bloomberg News survey of 18 economists showed. That would compare with 545 billion yuan in August. M2, the broadest measure of money supply, may have climbed 18.9 percent in September from a year earlier, according to economists’ median estimate.

Those numbers will be released in the same statement from the central bank.

Exchange rates dominated the annual meeting of the International Monetary Fund in Washington amid concern that nations are relying on cheaper currencies to aid growth, risking trade wars. China was accused of undervaluing the yuan, while low interest rates in the U.S. and other rich nations were blamed for flooding emerging markets with capital.

Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF to study the matter.

To contact Bloomberg News staff for this story: Lifei Zheng in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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