March 31 (Bloomberg) — China overtook Japan as the world’s largest holder of foreign-currency reserves last month, the latest evidence of China’s rising influence as an international financial power.
The Chinese government’s currency assets excluding gold rose to $853.7 billion as of Feb. 28, surpassing Japan’s $831.6 billion, according to Bloomberg News calculations using government data. China’s reserves, which now account for 20.1 percent of the world’s total of $4.3 trillion, climbed a third during the past year. Japan’s reserves account for 19.5 percent of the total.
A record trade surplus and a flood of foreign investment has pushed China’s currency holdings higher, increasing pressure on the yuan to rise in value and prompting the government to encourage investment overseas and purchases of imports. The U.S., led by Treasury Secretary John Snow, is pressing China to let its currency move with market forces.
“One can think of the phrase `be careful what you wish for’ if China revalues,” said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. A strengthening of China’s currency could affect “import prices, inflation pressures in the U.S., and could make the Fed’s job more difficult,” Sinche said.
U.S. lawmakers are considering more than a dozen pieces of legislation that would place punitive tariffs on Chinese imports unless the yuan is allowed to strengthen. Lawmakers including Senator Charles Schumer, a New York Democrat, say China’s undervalued currency hurts U.S. exports.
Yuan’s Gains
Since the yuan, a unit of the renminbi, was revalued by 2.1 percent against the dollar on July 21, it has only gained about 1 percent. The yuan rose to the highest today since July’s revaluation on speculation the market will have more influence on exchange rates after the foreign ministry yesterday said currency participants determine the value.
The yuan rose as high as 8.0173 against the dollar and was 8.0175 at the 3:30 p.m. close in Shanghai from 8.0264 yesterday, taking gains on the week to 0.16 percent, according to data compiled by Bloomberg.
Canada’s central bank governor, David Dodge, said yesterday in Princeton, New Jersey, that China shouldn’t be allowed to “frustrate market forces” by blocking movements in exchange rates.
$1 Trillion
Both China’s government and central bank have said they will make the country’s exchange rate system more flexible, while ruling out another revaluation. China’s reserves may rise to $1 trillion by the end of this year, marking the first time any nation’s reserves have reached that level, according to Stephen Green and Tai Hui, China economists for Standard Chartered Plc China economists.
China’s trade surplus tripled to $102 billion last year, helping to drive economic growth of 9.9 percent, the fastest among the world’s major economies. Schumer and South Carolina Republican Senator Lindsey Graham, after visiting China last week, postponed a vote on their China sanctions bill to give the country more time to change its currency system.
People’s Bank of China Governor Zhou Xiaochuan said in a speech March 20 that adjusting the yuan’s value won’t reduce the trade surplus. He said China will need two to three years to achieve balanced trade by increasing domestic consumption.
“The Chinese government has started expanding domestic market demand, lowered deposit rates, liberalized markets, allowed for exchange-rate fluctuations as part of our policy of improving the balance of international payments,” Zhou said. “The U.S. side must lower its fiscal deficit and boost savings.”
Direct Investment
China’s reserves of foreign currency, which economists say are between 70 percent and 80 percent in dollars, rose by an average $17 billion a month in 2004 and 2005. That was also fueled by about $120 billion of foreign direct investment and billions of dollars of capital inflows betting on a rising yuan.
“We have to be somewhat careful about a radical revaluation” of China’s currency, said Mickey Kantor, a former U.S. trade representative under President Bill Clinton and now a partner at the law firm of Mayer, Brown, Rowe & Maw LLP. “It could lead to more non-performing loans, which could make the banking system weaker. This is something we do not want to do.”
Kantor said U.S. should still be “strong advocates” for a revaluation of China’s currency.
Treasury Holdings
China’s holdings of foreign currency assets are now so large the country is shifting more of the added reserves into euros and yen to reduce its exposure to dollar-denominated assets.
China has been investing its reserves in U.S. bonds and assets. China held $262.6 billion in U.S. government Treasury bonds at the end of January, making it the largest investor after Japan. China’s purchases of Treasuries have helped hold down market interest rates in the world’s largest economy.
On March 5, Zhou said China won’t reduce the size of its dollar holdings, though the central bank will “adjust” total reserves based on international market conditions.
In a separate report, the International Monetary Fund said today central banks cut their U.S. dollar reserves for the fifth straight year in 2005 and also pared their holdings of the euro and yen.
Central banks held 44.8 percent of their total foreign- exchange reserves in the U.S. currency at the end of the fourth quarter, compared with 46.8 percent in the same period of 2004, the Washington-based IMF said.
As recently as 2001 the world’s central banks held over half of their reserves in dollars. The new figures validate speculation among investors that central banks are reducing holdings of dollars in favor of other currencies.