China’s foreign exchange reserves increased $96.8bn in the third quarter to total $1,906bn, but a marked slowing of the growth of Beijing’s currency war chest is fuelling suggestions the tide of speculative capital that has flowed into the country has finally turned.
The reserves grew $21.4bn (€16bn, £12bn) in September – far below the foreign exchange inflow generated by a record $29bn trade surplus and $9.9bn in foreign direct investment.
Beijing has been concerned about “hot money” being brought into the country by businesses and individuals betting on the continued rise of the renminbi, worrying that such inflows will inflate asset bubbles, fuel inflation, put further upward pressure on the currency and create potential vulnerabilities in the domestic financial system.
Near total government secrecy about the composition of the reserves and how they are accounted for makes judging the scale of speculative flows highly difficult, but Stephen Green of Standard Chartered, said Tuesday’s data showed a clear exodus of “unexplained” capital in the last quarter after inflows of $162bn in the first half.
“(This indicates) the problem is beginning to sort itself out,” Mr Green said. “This is certainly reducing some of the pressure, which will be welcome in Beijing.”
However, Ben Simpfendorfer, economist for RBS, said the low level of reserve accumulation in the third quarter could be explained by a fall in the dollar value of other currencies being held by the People’s Bank of China, the central bank.
“The upshot is that speculative capital inflows have dried up, but not yet reversed,” Mr Simpfendorfer wrote in a research note.
China remains easily the fastest growing major economy and continued appreciation of the renminbi is widely seen as inevitable, but policymakers have in recent months sharply curtailed the currency’s rise against the dollar while property markets have stalled and the stock market has slumped.
China’s broad measure of money supply grew at just 15.3 per cent last month, down from 16 per cent in August and its slowest pace in more than three years.
In spite of continuing strong growth in exports and last month’s record trade surplus, China is expected to soon begin suffering the impact of falling demand from vital markets such as the EU and US that are being hit hard by the widening global financial crisis.
Beijing’s huge stock of foreign exchange reserves – the world’s largest and on course to exceed $2,000bn by the end of the year – provides a powerful buffer, but policymakers concerned that China’s financial system could one day be vulnerable to a destabilising flight of foreign capital are sure to keep a close eye on the shift in speculative flows.
Mr Green said the tide could turn again once the effects of the global financial crisis eased and investors started to look for places to invest cheap dollars. “There is a potential that a chunk of this stuff could come back,” he said. “We are not out of the woods yet.”
