FT.com / Lex / Finance & governance - China’s $2,000bn foreign reserves: It appears the great unwinding of global imbalances and the dollar’s ensuing demise are notions that belong up there with the tooth fairy. China added $178bn to its foreign reserves in the second quarter, taking its total booty past $2,000bn, the equivalent of twice the annual economic output of New York
Although there are no official statistics on how China has apportioned these new reserves, US data supports the thesis that China is not yet jettisoning the dollar, however antsy Beijing gets about the greenback’s global dominance. Even so, the pattern of China’s reserve accumulation is changing. While China is still buying more US debt, it is not necessarily doing so with cash recycled from American consumers. The sum of China’s trade surplus and foreign direct investment, the usual driver of reserve accumulation, was the lowest in three years. At about $60bn, it was also almost half last year’s quarterly average of $100bn, according to Royal Bank of Scotland. Rather, China’s hoarding is being driven by hot money.
After all, China, the world’s favourite green shoot, is back in bubble land; its reserve growth is just one indication of this. Estimates vary widely, but between $30bn and $70bn of speculative capital flowed into China in the second quarter. Some of that may be anticipating a possible revaluation of the renminbi. More likely are flows into real assets such as property or the stock market, where volumes are running at as much as three times last year’s levels. Hong Kong residents, having spent much of the past year grinding down their renminbi deposits, added more funds in May.
To mop up some of this liquidity, Beijing has started selling one-year sterilisation bills again (so far this year, the central bank has actually injected net cash into the system). Last year, it issued an estimated $170bn of these bills. Roaring reserves, a bubbly stock market and the tentative start of monetary tightening: all these recall the glory days of 2007-08. Still, don’t expect everything to return full cycle. Exports, for one, are weak. While that remains the case, renminbi appreciation is off the cards.