Strong Dollar Cuts $48 Billion from China's Reserves

Friday, 14 May 2010 08:10 AM

The strength in the U.S. dollar reduced China's foreign exchange reserves by $48 billion in the first quarter, the State Administration of Foreign Exchange said on Friday.

China previously reported that its foreign exchange reserves, the world's largest, rose by $47.9 billion in the first quarter, but this understated the true reserve growth of $95.9 billion because of currency and asset valuations, SAFE said.

As China's reserves are denominated in dollars, the weakness of non-dollar currencies, such as the euro, in the first quarter reduced the valuation of its forex holdings, a SAFE official said in a news conference.

Active dollar carry trade and confidence in China's economic growth are driving funds to the world's third-largest economy, resulting in a capital and financial account surplus of $55 billion in the first quarter, it added.

"Capital inflows are putting huge pressure on the central bank, but it has many monetary tools to relieve the pressure," the SAFE official said, without going into details.

China's current account surplus fell 48 percent in the first three months to $40.9 billion, accounting for 3.5 percent of its gross domestic product as compared with 8.2 percent in the same period last year, SAFE said.

"This shows our country's efforts to restructure the economic growth model is yielding some initial results," the official told reporters.

To explain a surge in the capital and financial account, SAFE said net foreign direct investments rose 79 percent in the first quarter to $17.5 billion and credit for trade finance grew, instead of declining.

China's banks channeled in a net $15.3 billion from abroad in the first three months to meet domestic demand for foreign currency loans, as compared with a net outflow of $1 billion in the same period last year, it added.

The country's net foreign debt also increased by $13.6 billion in January through March, while it declined by $7.9 billion a year earlier, according to SAFE.

© 2015 Thomson/Reuters. All rights reserved.

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