China Currency Reserves Rise to Record $1.9 Trillion

By Kevin Hamlin and Li Yanping

Oct. 14 (Bloomberg) -- China's foreign-exchange reserves rose to a world record $1.906 trillion, helping to strengthen the nation's finances as the credit crisis threatens to trigger a global economic slump.

Currency holdings rose 32.9 percent at the end of September from a year earlier, the People's Bank of China said on its Web site today. The increase of about $97 billion over the quarter was down from a $126.6 billion gain in the previous three months.

China has cut interest rates twice in the past month as the worst financial crisis since the Great Depression dims the outlook for exports. The world's fourth-biggest economy can still achieve growth of 10 percent this year and 9 percent in 2009, central bank Deputy Governor Yi Gang said Oct. 11 in Washington.

``Close to $2 trillion in foreign reserves provides China with a strong foundation and more room to adjust policies to enable it to maintain relatively fast growth,'' said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

A record $29.3 billion trade surplus last month contributed to the reserves. Still, the increase in the currency holdings for September alone was only $21.4 billion.

``There's no way that speculative capital is flowing into China now,'' said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. ``The third quarter brought a huge increase in risk aversion and the repatriation of capital from emerging markets to the U.S. in particular.''


Fiscal Strength

Standard & Poor's cited the reserves and the nation's ``strong fiscal position'' when it upgraded China's long-term debt rating to A+, the fifth-highest grade, on July 31.

Government concern that currency inflows will help to ``overheat'' the economy and drive up prices has diminished after four quarters of slowing growth and four months of easing inflation.

China is grappling with how best to manage the reserves, forecast by the International Monetary Fund to reach $2.2 trillion by year's end and $2.7 trillion by the end of 2009. Diversifying away from U.S. Treasury bills has brought losses.

China Investment Corp., the nation's sovereign wealth fund, put money into Morgan Stanley and Blackstone Group LP before their stocks plunged. It also may have as much as $5.4 billion frozen in a U.S. money-market account that suspended withdrawals last month.

`Hot Money'

Smaller increases in the reserves -- down from a record $153.9 billion gain in the first quarter -- may signal waning inflows of so-called ``hot money,'' speculative capital attracted by rising interest rates and a strengthening currency.

China has stalled the yuan's gains against the dollar since mid-July. That step, along with rate cuts and crackdowns by regulators on illegal channels for pumping money into the country, may have helped to stem inflows.

``Unexplained inflows are disappearing,'' said Michael Pettis, a finance professor at Peking University, who estimated that more than $200 million of speculative capital flooded in during the first half.

``Hot money inflows have petered out on slower yuan rises and a perceived economic slowdown,'' said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. ``The next issue is: how aggressive will the authorities be in easing rates? There's scope for them to be a lot more active.''

The yuan remains Asia's best performer against the dollar this year, rising 7 percent. The nation's key one-year lending and deposit rates are 6.93 percent and 3.87 percent. Economic growth was 10.1 percent in the second quarter.

Money supply growth slowed last month, the central bank said today. M2, the broadest measure, increased 15.3 percent from a year earlier, compared with a 16 percent gain in August.

The median estimate of 14 economists in a Bloomberg News survey was for a 16 percent increase.

To contact the reporter on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net.