Home > Banks, China > PBOC’s Zhou Urges Cutting China’s $3 Trillion of Foreign-Exchange Reserves

PBOC’s Zhou Urges Cutting China’s $3 Trillion of Foreign-Exchange Reserves

April 19, 2011

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PBoC Governor Zhou Xiaochuan

Zhou Xiaochuan, governor of the People’s Bank of China. Photographer: Qilai Shen/Bloomberg

China needs to reduce its foreign- exchange reserves as they exceed the level the nation requires, central bank Governor Zhou Xiaochuan said.

The management and diversification of the holdings, which topped $3 trillion at the end of March, should be improved, Zhou said after a speech at Tsinghua University in Beijing late yesterday. The rapid accumulation is putting pressure on the sterilization operations of the People’s Bank of China, he said.

The nation’s foreign-exchange reserves climbed $197 billion in the first quarter, reflecting global imbalances that Group of 20 finance ministers agreed last week to address through deeper scrutiny of their economic policies. China’s surging holdings are fueling inflation that accelerated last month to the highest in 32 months, prompting the government to boost banks’ reserve requirements this week for the fourth time this year.

“Foreign-exchange reserves have exceeded the reasonable levels that we actually need,” Zhou said. “The rapid increase in reserves may have led to excessive liquidity and has exerted significant sterilization pressure. If the government doesn’t strike the right balance with its policies, the build-up could cause big risks,” he said, without elaborating.

The world’s second-biggest economy grew 9.7 percent in the first quarter from a year earlier, faster than economists had forecast, and consumer prices climbed 5.4 percent in March, the government said last week.

Lending Spree

The nation’s currency holdings jumped by the second-biggest amount on record in the January to March period, even as the nation reported its first quarterly trade deficit in seven years. Economists attributed much of the increase to capital inflows betting on appreciation of the yuan.

The funds have added to the liquidity that’s flooded the economy over the last two years as the government encouraged an unprecedented lending boom to support growth amid the global financial crisis.

Zhou said speculative inflows of funds are not a major concern given that China is a large economy which maintains controls on capital flows for investment purposes. Still, liquidity is excessive and the government needs to “remain vigilant” over the property market and take “counter- cyclical” measures to curb surging real-estate prices, he said.

Diversifying the nation’s reserves through investment agencies such as China Investment Corp., the country’s sovereign wealth fund, is a consideration, Zhou said, while declining to answer questions on whether CIC will receive more capital from the nation’s foreign-exchange holdings.

‘Negative’ Outlook

CIC’s Chairman Lou Jiwei said the fund may get more capital to invest in overseas markets, China National Radio reported on April 17.

“One option is to consider some new types of investment agencies which focus on new investment areas,” Zhou said. “It’s inappropriate for me to detail the next stage of the plan, but the direction is clear.”

Fitch Ratings lowered its outlook on China’s AA- long-term local-currency rating to negative from stable last week, the first time in 12 years the nation’s debt rating faces a cut. Fitch said there was a “high likelihood of a significant deterioration” in banks’ asset quality after a record jump in lending in the last two years.

Moody’s Investors Service also lowered its outlook on China’s property industry to negative from stable on concern residential sales could decline by as much as 30 percent as local governments enforce housing curbs.

Local-Government Bonds

“The ratings given by international credit agencies shouldn’t be taken too seriously,” Zhou said. “They may have good insights on many projects and companies but it’s hard for me to comment on their sovereign ratings,” he said in response to questions about the revisions.

Loans to companies and households in China rose to about 140 percent of gross domestic product last year from 111 percent in 2008, Fitch said. Much of the increase was linked to property lending and credit to the financing vehicles of local governments who aren’t allowed to issue bonds.

Zhou said today that letting local authorities sell debt, whose repayment could be partly supported by property tax revenues, is a subject that “merits discussion” although such a move would require a change in the law.

The ability of domestic financial markets to adequately price such debt also needs to be studied, he said.

  1. corina m.
    April 21, 2011 at 12:03 am

    For the fourth time this year China’s central bank announced Sunday the biggest Chinese banks must hold greater cash reserves. China’s financial leaders are struggling to keep inflation in check. A world addicted to cheap manufactured goods from China could possibly be in for a shock. Meanwhile, Donald Trump, pandering for a presidential bid, proposed a 25 percent tariff on Chinese imports that was roundly ridiculed by economists. I read this here: China struggles to curb inflation that threatens global growth

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