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China's Forex Reserves Post Big Rise, Now Top $2 Trillion

  • Kathleen Moore

A large part of China's foreign exchange reserves is believed to be in dollars, including hundreds of billions of dollars' worth of U.S. government debt.

A large part of China's foreign exchange reserves is believed to be in dollars, including hundreds of billions of dollars' worth of U.S. government debt.

China’s foreign exchange reserves -- already the biggest in the world -- have topped the $2 trillion mark for the first time, in a sign that overseas investors are increasingly confident the Chinese economy is improving.

It also might mean China will buy more U.S. debt, which is being sold in record amounts as Washington tries to spend its way out of recession.

China’s reserves had almost doubled since 2006 thanks in part to the huge trade surplus China ran with the rest of the world. But in recent months that surplus has narrowed.

Today’s data showed that has comprehensively reversed itself and now it seems that the rest of the world is piling its money back into China, which obviously is testament to the sense that China’s economy is recovering pretty rapidly.
And so today’s figures, showing a rise of nearly $180 billion in reserves in the last three months alone, were larger than many observers had expected.

“China over the course of 2007 and 2008 did see some very big increases in its foreign exchange reserves, but that stopped quite abruptly at the end of last year," says Mark Williams, China economist for Capital Economics in London. "There were two reasons -- one was that the trade surplus started to fall. The second reason was that people had started to pull their money out of China, as concerns about the global financial system grew, and multinationals, for example, needed the money closer to home.

"Today’s data showed that has comprehensively reversed itself and now it seems that the rest of the world is piling its money back into China, which obviously is testament to the sense that China’s economy is recovering pretty rapidly.”

So the fact that China's foreign exchange reserves have crossed the $2 trillion threshold is due to the return of investors, rather than a surplus of exports over imports.

Those investors will see on June 16 if they’re right in anticipating that recovery, when China releases GDP figures for the second quarter.

Economists surveyed by Bloomberg expect them to show growth of 7.8 percent.

What’s also of interest is what China does with those reserves.

A large part -- perhaps around 70 percent -- is believed to be in dollars, including hundreds of billions of dollars' worth of U.S. government debt, making China Washington’s biggest foreign lender.

'Can't Keep On Borrowing'

President Barack Obama said in May that the United States “can’t keep on just borrowing from China,” and that major purchasers would at some point “get tired” of buying U.S. debt.

In the long term, his administration has pledged to get its ballooning deficit under control.

But right now, the U.S. government is selling increasing amounts of debt to finance efforts to counter the recession that have pushed the budget deficit above $1 trillion.

So will China keep lending to the United States?

Chinese officials have said in recent months that they’re worried about the safety of their huge investments.

And yet Williams says despite those concerns it’s evident from today’s figures that China is still continuing to buy U.S. debt.

In a narrow sense, he says, that’s good news for the U.S. But he adds: “The Chinese could do something else with this money -- they could buy imports. And right now what the U.S. and the rest of the world needs is demand for its goods. So if the reason China is buying up financial assets overseas is simply because it’s still running large current account surpluses, then that’s not really a positive thing for the rest of the world.

"We’d much rather see China’s economy become more balanced, with its demand from the rest of the world more closely balanced with the amount it ships to the rest of the world.”
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