Hot Money betting on a float or repeg still flowing into China
China central bank says capital inflows add 1.6 trln yuan to 2004 money supply
Monday, February 28, 2005 8:34:52 AM
BEIJING (AFX) - The People's Bank of China (PBoC), the central bank, said foreign capital inflows added 1.6 trln yuan to the country's money supply last year, 463.9 bln yuan more than that of 2003, which increased the difficulty of its open market operations
"Foreign capital inflows have become a major driver behind the increase in liquidity among banking systems, " the PBoC said in its annual report on open market operations last year
"The central bank faces relatively big pressures in managing liquidity and money supply," it said
China has been facing pressure to revalue its currency, the yuan, from major trading partners including the US and Japan, who blame Beijing for keeping the yuan exchange rate artificially low to gain unfair competitiveness in foreign trade
International hot money came into China on a bet China will appreciate the yuan exchange rate in response to the pressure, which has created much more liquidity in the money market
In response the central bank has increased its open market operations, by issuing more bank bills to soak up liquidity
The central bank also said that commercial banks excessive deposit reserves, the part banks put with the central bank over the required 7.5 pct level, are expected to continue to fall in the future, but at a slower pace
The excessive deposit reserves ratio fell to around four pct last year from a high of over seven pct in 2000, according to the central bank report
Last week, the central bank said in its monetary policy report that it is considering using both the required deposit reserves ratio and open market operations to control money supply, because of mounting capital inflows which make it more difficult to rein in money supply with bank bills
The central bank issued a total of 1.5 trln yuan in bank bills in 105 batches last year, with outstanding bank bills standing at 974.2 bln at the end of last year
Critics have said that the central bank should think about other ways to control money supply, including using the required reserve ratio and interest rates to adjust money supply as the bank bills increase the PBoC's costs
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