China’s biggest reserves jump since 2011 sows capital inflow

China’s foreign-exchange reserves rose last quarter by the most in more than two years, a sign the government’s efforts to protect growth attracted money even as developing nations from India to Indonesia saw capital exit.

Reserves were a record $3.66 trillion at the end of September, the People’s Bank of China said yesterday in Beijing, up from $3.5 trillion in June. The median projection was $3.52 trillion in a Bloomberg News survey of seven economists.

The data suggest Premier Li Keqiang’s efforts to boost expansion stoked capital inflows while emerging markets suffered outflows on concern the U.S. Federal Reserve would taper monetary stimulus. The yuan strengthened by the least in five quarters in the July-September period, signaling central bank intervention to slow gains in the currency.

The foreign-exchange data probably reflects China’s safe-haven status and suggests hot money came into the country during the period of market turmoil,” said Timothy Condon, ING Groep NV head of Asia research in Singapore.

The yuan extended gains following the release and rose 0.2 percent to 6.1079 per dollar after touching the strongest level since the government unified official and market exchange rates at the end of 1993. The currency gained about 0.3 percent in the third quarter, following a 1.2 percent increase in the previous period.

Growth Pickup

The world’s second-biggest economy probably grew 7.8 percent last quarter, up from 7.5 percent in the April-June period, based on the median estimate in a Bloomberg News survey ahead of a report due Oct. 18. Previous reports showed exports unexpectedly fell in September and two manufacturing gauges rose less than estimated, indicating limits on a recovery seen in July and August data.

The central bank didn’t give an explanation for the increase in reserves. It didn’t immediately respond to a faxed request for comment from Bloomberg News.

The market is saying that China data is improving,” saidThomas Harr, head of Asia local-markets currency and rates strategy at Standard Chartered Plc in Singapore. “In the very short term the cyclical data has started to improve and that is what is supporting the currency and thereby also inflows into the currency.”

Zhou Hao, Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said the surge in reserves reflects capital inflows and the central bank’s intervention as it bought “intensively” to prevent the yuan from strengthening.

Shadow Finance

New yuan loans topped estimates in the central bank data while the broadest measure of credit fell from August, as authorities try to support expansion without boosting shadow finance. Money-supply growth slowed in September, with M2, the broadest gauge, rising 14.2 percent from a year earlier.

Aggregate financing was 1.4 trillion yuan ($230 billion) in September, compared with 1.65 trillion yuan a year earlier. New yuan loans from banks were 787 billion yuan, exceeding the 675 billion yuan median estimate of economists. They accounted for 56 percent of aggregate financing, compared with about 45 percent in August and 87 percent in July, according to previously released data.

The PBOC may have implicitly expanded new loan quotas for banks as the authorities try to rein in the shadow banking sector,” Chang Jian, China economist at Barclays Plc in Hong Kong, said in a report.

Chinese banks have advanced about 1.3 trillion yuan of mortgage loans in the first eight months compared with 300 billion yuan in the first half of 2012, Lian Ping, Shanghai-based chief economist at Bank of Communications Co., said last week.

Loan Quotas

Banks are running out of quotas to offer more mortgage loans in the rest of the year and without financing support, home prices are unlikely to gain significantly, Lian said.

Foreign-exchange reserves will probably keep growing for another quarter before outflows resume on a tapering of bond-buying by the Fed, said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. The holdings are rising in part because Chinese companies are selling their dollars for yuan, Liu said.

China’s stable currency, large current account surplus and robust financial conditions could make China a defensive place when some other emerging markets were hit by a possible U.S. QE tapering,” Bank of America Corp. economists including Lu Ting, head of Greater China economics, and Zhi Xiaojia said in a note, referring to quantitative easing. (Bloomberg)