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UPDATED: January 28, 2013 NO. 5 JANUARY 31, 2013
A Dip in Growth
A slower rate of growth in China's foreign exchange reserves could be good for an economy in transition
By Lan Xinzhen

SLOWER GROWTH: China's foreign exchange reserves have grown slowly, which has been conducive to the country's economic balance (XINHUA)

The People's Bank of China (PBC), the country's central bank, said that by the end of 2012 China had foreign exchange (forex) reserves totaling $3.31 trillion, the highest amount in the world. However, the country's forex stash grew by only $130 billion, the lowest since 2004.

According to PBC figures, forex reserves grew at its fastest rate in 2007, when it was up by $460 billion. Since then, growth has been in steady decline.

Wang Yongzhong, a researcher with Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS), thinks slower forex growth may not be good news for the global economy since China's fast reserve growth has been an impetus for global economic development. Most of China's forex reserves come from trade surpluses, which the government uses to buy treasury bonds from the United States and other countries. The purchase of these treasury bonds aids the economic development of these countries. But at a crucial moment for global economic recovery, the growth in China's forex investments has slowed.

But for China, slower growth means less pressure on the yuan to appreciate and less head-butting between China and the United States, which often threatens to brand China a currency manipulator.

Lian Ping, chief economist at the Bank of Communications, says the shrinking growth of reserves illustrates the vigor of China's outbound investments.

Figures released by the General Administration of Customs show that China recorded a trade surplus of $231.1 billion in 2012, a surge of 48.1 percent compared to 2011. In 2012, China attracted foreign direct investment (FDI) of $111.72 billion, according to the Ministry of Commerce.

The forex reserve is composed of trade surpluses and foreign investment. Despite a big trade surplus and steady inflow of FDI, China's forex reserves only increased by about $130 billion, indicating that outbound investments are increasing.

The PBC's figures also confirm this. In the second and third quarters of 2012, China's capital and financial account saw consecutive deficits, and the deficits totaled $85.4 billion in the first three quarters, which tallied the quotas from qualified domestic institutional investors that were newly approved by the State Administration of Foreign Exchange (SAFE).

In comparison, during the first three quarters of 2011 China's capital and financial account had a surplus of $234.1 billion. "More forex assets have been transferred from the government to domestic institutions and individuals, and overseas investment by domestic companies is accelerating, which is an important reason for the slowdown in growth of China's forex reserves," Lian said.

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