Concerns over China’s currency policies have reached new highs, as China’s stockpile of foreign exchange reserves does the same. The Chinese foreign reserves are the world’s largest, and may have just hit the $2.5 trillion mark sparking complaints that the nation may be undermining the recovery of the global economy through its currency interventions.
Estimates are that currency holdings increased in the third quarter about $48 billion, compared to the previous three months of only $7 billion, which is the smallest rise in 11 years. Tom Orlik, of Stone & McCarthy Research Associates in Beijing said, “The massive build-up of the foreign-exchange assets would only give more ammunition to those China critics who call for a rapid appreciation of the yuan.”
China replaced Japan in the second quarter as the second largest economy in the world, and US Treasury Secretary Timothy Geithner has said that a stronger yuan would increase demand in China. Zhou Xiaochuan, Governor of China’s Central Bank, commented that China would need to avoid the “shock therapy” of a rapidly appreciating yuan, where inflows of cash would threaten to increase inflation and worsen the risks associated with asset-bubbles in the economy.
China’s currency reserves reached the $2 trillion mark early last year, but the weakness of the US dollar has had a part to play in the huge increase in foreign exchange holdings in the third quarter. Today yuan futures reached the highest levels in two years, as speculation grows that the Chinese government will let the yuan appreciate as pressure mounts from trading partners.
