China's reserves hit the US$2 trillion mark although the country doesn't really have anywhere else to invest except the American dollar even as U.S. Treasuries holdings decline in value, says the chief economist at Citi's Global Markets Asia, Joanna Chua.
"In reality there's really no major alternative to the U.S. dollar or to investing outside of the U.S.," Chua told Bloomberg.
"Certainly the alternatives are quite limited at this point."
In the second quarter of 2009, China's foreign reserves have risen by about $107 billion, a growth rate that Chua deems "staggering" especially when considering the cumulative trade surplus and foreign direct investment flowing into the country on top of hot money coming into the Chinese economy.
The numbers come out as China calls for a new global reserve currency, a quest Chua describes as not coming to fruition any time soon.
"I really think that looking for an alternative outside of the U.S. as a global reserve currency is really not very realistic to have many major changes in the near term."
The U.S. economy won't gain any serious steam any time soon, which will force China to look internally for growth as opposed to exporting more goods to the United States, Chua says.
Chinese asset prices have been on the rise as of late, including stock and real estate values that have some guessing that a bubble may be brewing and that tighter monetary policy may be needed, especially if inflationary fears arise, Chua says.
At over $2 trillion, China's foreign reserves are the world's largest, especially as Chinese Premier Wen Jiabao's stimulus packages trigger major lending and investment within the country.
“Hot money is flowing back,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney, according to Bloomberg. “China has the strongest prospects out of all major economies.”
China appears poised to meet its 2009 growth target of 8% despite poor performance in the first quarter of this year, when the economy grew 6.1% — way below expectations. Government spending and loose monetary policy that lead to increased bank lending is driving growth.
Inflation has not become a problem in China as of late, yet analysts believe that the government will rein in stimulus money to keep the economy growing at a healthy pace.
“We believe that the rapid recovery in growth, plus concerns about inflation and asset quality, will lead to a change in macro policy, and we look for policy consolidation in the months ahead,” says Wang Tao, an economist at UBS in Beijing, according to the Financial Times.
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