China’s foreign exchange reserves surged in the fourth quarter by a record amount while the money circulating within the Chinese economy also climbed more than expected in December, according to government statistics released Tuesday that underline the country’s worsening inflation dilemma.
The Chinese government has been printing renminbi at a furious pace to buy foreign currencies like the dollar and the euro, which are pouring faster and faster into the country through trade surpluses and foreign investment. The People’s Bank of China, which is the country’s central bank, has been doing so in an effort to hold down the value of the renminbi and preserve a competitive advantage in foreign markets for exporters in China and the tens of millions of workers they employ.
The extra renminbi issued to pay for rising foreign exchange reserves will make China’s inflation problem even worse, said Diana Choyleva, an economist in Hong Kong for Lombard Street Research. The extra renminbi come as the Chinese central bank has been grappling with the additional money that it pumped into the Chinese banking system in 2009 and early 2010 to keep the economy growing through the global financial crisis.
“Considering that they engineered the most dramatic monetary expansion in their own history and in the world’s since World War II, there was a large monetary overhang” even before the recent currency market intervention, Ms. Choyleva said.
The sharp increase in foreign reserves during the past quarter and the inflation that they threaten to cause in the Chinese economy may embolden U.S. officials to press harder for China to loosen its hold on the renminbi. President Hu Jintao of China is scheduled to visit the United States next week, and U.S. officials have already said that currency issues will be on the agenda.
Chinese officials are likely to respond, however, by pointing to data released on Monday that showed that the trade surplus narrowed slightly in 2010 compared to 2009, and fell particularly in December.
An analysis of the data by Standard Chartered said that trade and government-approved foreign investments into China accounted for less than half of the increase in foreign reserves in the fourth quarter; investors around the world have also been putting money into Chinese real estate, bank accounts and other investments despite efforts by the Chinese government to discourage these capital inflows.
The Chinese foreign reserves leaped by $199 billion in the fourth quarter, to $2.85 trillion. The increase was much larger than economists expected, and the numbers suggested that China had about doubled its intervention in currency markets to about $2 billion a day.
Foreign reserves had risen by $194 billion in the third quarter, but economists had estimated that about half of that increase had come from interest payments and an appreciation of the value of the euro. China holds an estimated $700 billion in euro-denominated assets that go up and down in dollar terms as the value of the euro fluctuates.
The value of the euro has declined 2.1 percent against the dollar. So the sharp increase in overall value of the foreign reserves in the fourth quarter took place even as the value of China’s euro-denominated bonds and other assets was shrinking, economists said.
The People’s Bank of China also said Tuesday that the country’s broadly measured money supply, known as M2, was 19.7 percent higher in December than a year earlier.
Economists had been expecting an increase of 19 percent.
Broad measures of money supply reflect not just the extra renminbi put into the financial system by the central bank but also the pace at which banks are lending that money. Banking regulators have repeatedly ordered banks to slow their lending, with limited effect.
“Apparently, their jawboning to the banks is not working as effectively as they’ve wanted,” said William Belchere, the chief global economist at Mirae Asset, a big South Korean financial firm.
In an attempt to restrict lending, the People’s Bank of China raised six times last year the share of bank assets that banks must keep on deposit at the central bank. But banks have partly evaded those controls by moving loans and other assets off their balance sheets through securitization transactions.
Consumer prices rose 5.1 percent higher in November than a year earlier, according to government data. But many Chinese economists say that the consumer price index understates the true extent of inflation, because it excludes soaring costs for owner-occupied housing and is based heavily on the prices of an outdated list of consumer products that are no longer popular.
The National Bureau of Statistics has said that it is actively studying ways to improve the consumer price index. A bureau official said last week that inflation figures for December would be released on Jan. 20 or 21.