Growth in Chinese forex reserves slows

China’s foreign exchange reserves grew at their slowest pace in more than two years in June, prompting questions over whether the flow of speculative capital into China was slowing as a result of government efforts.

The People’s Bank of China said its foreign currency reserves grew to $1,810bn (€1,140bn, £910bn) at the end of June but increased by a relatively modest $11.9bn over the month after increasing by a record $75.5bn in April and $40.3bn in May.

China’s foreign exchange reserves, which are the biggest in the world, have trebled in size since 2004. But the $11.9bn increase in June was the smallest monthly jump since February 2006.

If the June figures were the result of a slowdown in capital inflows, it would provide a big relief to the government, which has tried to prevent flows of speculative “hot money” from leaking into domestic inflation.

But economists warned that the June reserve figures could reflect changes in the way reserves are accounted for rather than significant reductions in capital inflows.

This year’s large increase in reserves has become part of a debate in Beijing about whether to tighten monetary policy and accelerate currency appreciation to tackle inflation, or whether to relax those policies to avoid damaging the real economy.

The increase in reserves in June is less than the combined trade surplus and foreign direct investment figures, which could indicate that China saw an outflow of speculative funds at a time when currency appreciation was slower than earlier in the year.

Analysis of the reserves has been complicated this year by the creation of China Investment Corporation, the sovereign wealth fund, which is expected to receive transfers of reserves.

Some economists believe the June figures reflect a government policy obliging commercial banks to convert part of the reserves they hold with the central bank to US dollars from renminbi, in effect taking down the foreign currency stock on the central bank’s balance sheet.

Logan Wright, an analyst at Stone & McCarthy in Beijing, calculated that the 1 percentage point increase in reserve requirements in June decreased the headline figure for reserves by $40bn-$45bn. “There is no real evidence of outflows,” he said. “The June numbers reflect the strategy of outsourcing reserve accumulation to commercial banks.”

Ha Jiming at China International Capital Corporation said the slowdown in accumulation reflected concerns about the economy and the weak equity and property markets. “China has become less attractive to international hot money,” he said.

The central bank revealed that the annualised growth rate of money supply, as measured by the broad M2 indicator, had slowed from 18.1 per cent in May to 17.4 per cent in June.

Reuters reported that the ministry of commerce had made a formal proposal that the pace of renminbi appreciation should be slowed and tax rebates to exporters increased to prevent a big drop in exports. But Hong Liang at Goldman Sachs said: “Loosening monetary policy before energy price controls are lifted would en-tail significant risks of worsening the inflation outlook.”