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Forex reserve's annual growth drops for 1st time in decade

(Xinhua)
Updated: 2009-01-13 19:55

China's foreign exchange reserve increased $417.8 billion in 2008, $44.1 billion less than the increase in 2007, the People's Bank of China, the central bank, announced on Tuesday.

This is the first time China has seen a decline in the growth of its foreign exchange reserve since 1998.

The foreign exchange reserve increased nearly $45 billion in the fourth quarter to $1.95 trillion by the end of 2008, the central bank said in a report.

The reserve growth had been slowing in 2008. The total foreign exchange reserve at the end of 2008 was up 27.34 percent from the end of 2007. The growth rate from January to September was 32.92 percent and that from January to June 35.37 percent.

The marked growth slowdown was a result of a shrinking trade surplus and a possible slowdown in "hot money" flow, analysts said.

Despite the slowing down of foreign exchange reserve growth for the whole year, the monthly reserves for December increased by $61.3 billion, $30 billion more than the same month of 2007, according to the central bank.

"The reserves decreased in October and November as the increased amount in December outnumbers that in the last quarter," said Guo Tianyong, professor with the Central University of Finance and Economics.

According to Guo, expectation for a weaker yuan and extraction of capital from the Chinese market to ease capital supply pressure in the West were major factors leading to the decrease of foreign exchange reserves in the fourth quarter.

December saw a sharp rise in foreign exchange reserves as the Central Economic Work Conference pledged to keep the Renminbi stable based on a reasonable and balanced level, which reversed the expectation for a weaker yuan, he said.

China has been concerned about "hot money" brought into the country by businesses and individuals betting on the continuous rise of the Renminbi, worrying that such flows would create assets bubbles, fuel inflation, put further appreciation pressure on the currency and make the domestic financial system vulnerable.

With the de-leveraging of financial markets in developed countries since the financial crisis broke out, hot money flowing into China began to dry up, said analysts.