China moves to rein in forex reserves

China moves to rein in forex reserves


China will increase supervision and curb illegal foreign capital inflows as it tries to relieve pressures on its bulging foreign-exchange reserves, which are already the world's largest.

Overseas funds continue to move into the country on a large scale, aggravating the imbalance in international payment and raising pressure for a quicker appreciation of the yuan, the State Administration of Foreign Exchange said yesterday, citing deputy director Deng Xianhong.

"Management of foreign-exchange earnings and settlements should be strengthened to stop illegal capital inflows into the country disguised as earnings from trade," said the regulator.

The increase in prepaid payments has fallen 44 percentage points between November 2006 and April this year from the previous 10 months, said the regulator. By the end of April, the rise in foreign currency earnings from companies that were placed under special attention by the regulator dropped 40 percent from by the end of September last year.

"A huge inflow of foreign currency will exert pressure on the country's foreign exchange reserves," said Li Mingliang, an analyst at Haitong Securities Co.

"That also raises the demand for the yuan within the country and may act against the government's wish by quickening the pace of appreciation of the Chinese currency."

The yuan has risen 8.6 percent since China abandoned the decade-long fixed exchange rate of 8.28 to the US dollar on July 21, 2005. The pace of appreciation, however, is still far below the expectation of China's trade partners such as the United States and the European Union.

Analysts said the government is concerned that a fast rise in the currency may choke the economy by dampening the exports of Chinese products.

China's foreign-exchange reserves expanded to US$1.33 trillion at the end of June, up 41.6 percent from a year earlier and remained the largest in the world, the central bank said on Wednesday.