PBOC spends more in forex intervention
(Shenzhen Daily-Agencies)
Updated: 2005-03-02 14:58

China's central bank said Tuesday it spent 1.61 trillion yuan (US$195 billion) buying foreign currency last year to maintain the yuan peg against the US dollar, a rise of 40 percent over 2003.

As a result of the intervention, the central bank was forced to drain a net 669 billion yuan from the banking system via open market operations last year — more than double the 282 billion yuan drained in 2003.

“The huge amount of base money in the market ... has made the central bank face strong pressure to manage money flow and tweak base money supply,” the People’s Bank of China said in a report posted on its Web site.

China has managed the yuan in a razor-thin range of 8.276 to 8.28 against the US dollar since the Asian financial crisis in 1997/1998, but the currency is under pressure to rise because of heavy speculative and investment inflows.

The government is under pressure from the United States and other developed economies to let the yuan appreciate. They say the currency is undervalued, giving Chinese exporters an unfair advantage in world export markets.

Turnover on the China Foreign Exchange Trade System, which trades US dollars, the Japanese yen, the euro and Hong Kong dollars against the yuan, jumped 38 percent to a record US$209.04 billion last year — the highest since the market was established a decade ago, exchange data showed.

Strong trade surpluses and a heavy inflow of foreign investment has left the market flush with foreign exchange over the past five years and market players say the central bank was virtually the only buyer of surplus hard currency on the market.

The nation’s foreign exchange reserves hit a record US$610 billion at the end of 2004, up US$206.7 billion from a year earlier, official data showed.

In addition, the central bank is coping with billions of dollars in hot money flowing into China betting on an appreciation of the yuan.

China has resisted foreign pressure to free up the yuan but has promised to make the currency more flexible over time through gradual reform.

Keen to relieve pressure on the currency, China will cut its growing balance of payments surplus by letting more foreign currency leave the country, domestic media cited the nation’s foreign exchange chief as saying Monday.

Analysts say the government is more concerned with the country’s overall macroeconomic health than the cost of offsetting the impact of surging foreign reserves.

The government made open-market operations an increasingly important tool last year to tweak the supply of funds in the banking system, which had fuelled lending and stoked inflationary fears in the world’s seventh-biggest economy.

Total turnover in the central bank’s open-market operations jumped to 1.997 trillion yuan last year, it said in the annual report, up from 1.209 trillion yuan in 2003 and 364 billion yuan in 2002.

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