China’s FX reserves in March

Friday, 15 April 2011 07:37

China’s FX reserves in March have hit the 3 trillion level for the first time. This could be seen as a symbol of China's strength and growth yet it really shows how undervalued the Yuan is and how inflation is spiraling out of control. The pace of Chinese reserve accumulation during the first quarter was the second highest on record in dollar terms. China’s total FX reserves will surpass the size of the German economy within six months.

China’s holds half of all Asian reserves and just over 30% of the global total. For Asia as a whole, data released to date suggest that the pace of reserve accumulation was also strong elsewhere, with overall Asian reserves rising nearly USD 250bln during the first quarter. . Every dollar that goes into Chinese reserves means another 6.5 yuan is added to the economy and the central bank is continually trying to drain excess liquidity out of the economy.

The central bank of China is requiring reserves at 20 percent of deposits for China's biggest banks and analysts believe that the room for further increases is limited. China needs about $780 billion of reserves which would be sufficient to pay for three months of imports and to cover all short term foreign debt. This is the standard calculation for how much a country should hold in reserves.

China refuses to let the yuan rise faster to protect it's exports which is a major issue of its trading partners. But it is also a problem domestically as the internal economy will suffer from high inflation just to protect exporters.

Having that volume of US dollar reserves is also exposing them to the risk of the weak dollar and their exposure to US treasuries of which China holds about 1.2 trillion.