China's foreign exchange reserves touch $1.8 trillion

China's foreign exchange reserves, the biggest stockpile in the world, rose $126.7 billion (Dh468.3bn) in the second quarter to $1.81 trillion, but the pace of accumulation slowed dramatically in June, the central bank said yesterday. The People's Bank of China (PBoC) gave no reason why reserves rose just $11.9bn last month, the smallest increase since February 2006, after leaping $40.3bn in May and a record $75.5bn in April. Ma Xiaoping, an economist at HSBC in Beijing, suggested the slowdown was linked to a policy instituted by the PBoC last year, but not officially announced, requiring commercial banks to meet part or all of additional reserve requirements by lodging dollars, not yuan, at the central bank.

"This should be partly attributed to the one per centage point increase in the deposit requirement reserve -- most of the additional reserves were paid in foreign exchange," she said.

The PBoC announced the aggressive rise in required reserves – usually it increases the ratio by half a point – on June 7. When banks deposit dollars at the central bank to fulfil their reserve requirements, they do not appear on the PBoC's balance sheet as foreign assets.

The appeal of this tactic for the PBoC is that, because it is not buying dollars for its own account, it does not have to print yuan in exchange, a step that boosts the money supply with the potential of stoking inflation. Adding in the first-quarter rise of $153.9bn, China's official reserves have grown $280.6bn so far this year compared with an increase of $461.9bn in all of 2007. China's reserves have now tripled since the end of 2004 as the PBoC, in order to hold down the yuan, has bought most of the foreign exchange flowing into the economy.

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