China's forex reserves increase to US$711bn
(FT.com)
Updated: 2005-07-15 06:33

Mr Simpfendorfer said that so-called hot money accounted for US$11bn of the increases in reserves in the second quarter of this year, compared with a US$53bn inflow in the fourth quarter of 2004 at their peak.

The central bank conducts extensive money market operations to minimise the impact of capital inflows, issuing bills to drain liquidity from the system to ensure that it keeps in check the amount of money in circulation, a key driver of inflation.

The bank's operations, aimed at sterilising the impact of capital inflows, have been made easier by a growing gap in interest rates between China and the US.

China issues banks bills at home to drain the extra cash out of the banking system, while it puts substantial amounts of its foreign currency holdings in US Treasuries, which offer higher interest rates, making sterilisation for the moment profitable.

But Mr Green says that the value of the PBoC's outstanding bills is now equal to 12.5 per cent of GDP. "This increases the risks to the PBoC, particularly in the event of (Chinese) rates rising," he said.

China's policies to combat inflation have borne fruit this year, with the National Bureau of Statistics predicting that prices would rise in 2005 by 2.2 per cent, compared with 3.9 per cent in 2004.

Subdued inflation, and the threat of deflation, and moderate credit growth, have convinced many local economists that the time is not right now for a currency revaluation.