China's foreign exchange reserve reached us$1.2 trillion by the end of
March, up 37.36 percent from the same period last year, the People's Bank of
China announced yesterday.
"I'm not surprised at the figure," Cai Zhizhou, an economist with Beijing
University, said and added that forex sharp rise has become "normal".
China's forex reserve came to 609.9 billion U.S. dollars by 2004, 818.9
billion U.S. dollars by 2005 and 853.6 billion U.S. dollars by the end of last
February, making the country overtake Japan to become the biggest foreign
reserve holder of the world.
"The rising trade surplus is the major factor contributing to the forex
reserve boom," Cai said and pointed out that low prices of Chinese goods
contributed to the rising trade surplus.
"China needs forex reserve to avoid financial risks as the country's
dependence on foreign trade is going up," said Cai.
China's foreign trade has risen by more than 20 percent annually since 2002
while the ratio of foreign trade to GDP has risen from 30 percent to nearly 70
percent during the same period.
The country's trade surplus reached 46.44 billion U.S. dollars in the first
quarter, nearly double the 23.3 billion U.S. dollars surplus in the same period
last year.
However, the rising trade surplus has brought increasing trade frictions
between China and its trade partners.
To balance, the country has lowered and is considering to further lower
export rebates on certain goods, ranging from steel to textile.
The trade surplus in March went down to 6.87 billion U.S. dollars, cracking
the 10 billion mark for the first time since March 2006 and showing a downward
trend.
"A large-scale forex reserve may backfire," said Cai. "It is the major reason
leading to the excess liquidity in China."
The central bank has to spend quantities of basic money to purchase foreign
exchange, thus aggravating the problem of surplus fluidity
On the other hand, continuous growth of forex reserve has in fact increased
the pressure on appreciation of the Chinese currency, which in turn has exerted
greater pressure on value preservation of China's forex reserve.
It is estimated that by 2010, China's forex reserve will reach 2.9 trillion
U.S. dollars. China thus plans to launch a state forex investment company.
The investment company will issue 200 billion to 250 billion U.S. dollars of
RMB-denominated bonds. Money to be raised will be firstly used as strategic
investment for energy enterprises like CNOOC, earlier reports said.