| Foreign currency piles up in china { January 17 2006 } Original Source Link: (May no longer be active) http://www.washingtonpost.com/wp-dyn/content/article/2006/01/16/AR2006011600450.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2006/01/16/AR2006011600450.html
Foreign Currency Piles Up in China Reserve Fund Soared to Record in 2005
By Peter S. Goodman Washington Post Foreign Service Tuesday, January 17, 2006; D01
SHANGHAI, Jan. 16 -- China's state media on Monday reported that the country's foreign currency reserves swelled by more than one-third last year to a record $819 billion as its factories churned out goods for markets around the world, heightening the likelihood of fresh trade tensions with the United States.
Coupled with news only days earlier that China's world trade surplus tripled last year, to $102 billion, the country's burgeoning foreign exchange reserves seemed certain to intensify demands that China increase the value of its currency, the yuan, the worth of which is linked to the dollar. U.S. manufacturing groups argue that China's currency is priced too low, making its goods unfairly cheap on world markets. Lawmakers in Congress have pressed a bill that would impose across-the-board punitive tariffs on all Chinese goods unless the country substantially raises the value of its currency.
"This could give the senators more meat for their argument," said Stephen Green, a senior economist with the bank Standard Chartered PLC in Shanghai.
Chinese officials braced for further conflicts with the United States, particularly as many economists anticipate that the country's trade surplus will widen. A flood of investment into industries such as steel, automobile manufacturing and electronics has erected too many factories and produced more goods than China can absorb, sending prices falling while encouraging Chinese firms to seek sales abroad. Diminished profits and slowing investment temper China's demand for machinery and raw materials, limiting the need for imports.
"It's almost certain that China's trade surplus will remain at a high level in 2006," said Mei Xinyu, an economist at the Chinese Academy of International Trade and Cooperation in Beijing, a research institute operated by the country's Ministry of Commerce. "Obviously, there will be further pressure from trade protectionists in the United States."
China argues that it is being used as a scapegoat in Washington for the decline of U.S. manufacturing: The flow of capital to lower-cost manufacturing areas is a global phenomenon that is transferring jobs not only to China, but also to Latin America, Eastern Europe, India and Southeast Asia. About two-thirds of China's exports are produced in factories that are financed at least in part with foreign investment, undercutting the notion that this country's growing trade is coming at the expense of everybody else.
Analysts said the stance of China's Communist Party-led government will not change, despite the broadening of its global trade surplus and its buildup of foreign exchange. Beijing will continue to move only gradually to widen a band within which the yuan trades against the dollar, lest it unleash uncertainty in a financial system rife with risks -- not least, the existence of an estimated $500 billion in bad debt choking its banks.
China is loath to increase the yuan enough to dampen growth in its coastal factories. Exports are a key source of jobs in a country that must find tens of millions of them for poor farmers and workers laid off by bankrupt state factories in the continued transition from communism to capitalism.
Last July, China bumped up the value of the yuan by 2 percent against the dollar, somewhat diminishing tensions with the United States. But in the months since, the yuan has moved little against the dollar, though it has strengthened considerably against other currencies, such as the euro, as the dollar itself has climbed.
Still, some economists said China's reserves were now growing so huge as to compel the central bank to deliver a significant revaluation. Otherwise, China risks that its reserves will leak into the banking system and be lent out for speculative investments that will only worsen a feared glut of real estate and factory capacity.
"The renminbi [yuan] is fundamentally undervalued," said Ha Jiming, chief economist at China International Capital Corp., a giant state-owned investment bank. "As foreign exchange continues to grow, it will force a revaluation."
The details disclosed in Monday's state press accounts and reported Sunday on the Central Bank's Web site confirmed that China is on track this year to exceed $1 trillion in foreign exchange reserves. That would probably elevate China to the biggest holder of foreign currency, eclipsing Japan, which has $847 billion.
In recent weeks, Chinese policymakers have signaled a rethinking of investment priorities as they debate what to do with the reserves. Traditionally, China has sunk three-fourths of its reserves into U.S.-dollar-denominated investments, such as U.S. Treasury bills. Some have called for large purchases of oil to create a strategic petroleum reserve. Others have suggested that China will now devote a larger percentage of reserves to other world currencies such as the euro and the yen to reflect its balance of trade.
Some analysts say the size of the reserve gives China a tool to manage trade tensions. "The more China possesses U.S. dollars, the more China can invest in the U.S. and buy U.S. bonds and U.S. products like Boeing aircraft," said Shen Dingli, an American relations expert at Fudan University in Shanghai.
China has consistently harnessed its largesse in this way, timing the announcement of big-ticket purchases from the United States to mollify critics. As Shen acknowledged, however, China's investments have themselves stoked tensions -- not least, last summer when the state-owned oil company Cnooc Ltd. tried and failed to buy Unocal Corp. China and Japan have propped up the value of the dollar and financed U.S. spending by continuing to absorb U.S. debt via the purchase of Treasury bills. Yet these purchases have sown unease, with some in Washington complaining that the United States has relinquished control of its destiny to foreigners.
"The U.S. could fear concerns that as China possesses U.S. debt, that could give China the ability to influence the U.S. financial situation," Shen said.
The huge leap in China's foreign exchange and its trade surplus reflect a basic reordering of global manufacturing. Only a few years ago, laptop computers and televisions, for example, were completed in South Korea, Japan, Taiwan and Malaysia before being loaded onto tankers bound for U.S. ports, to be counted as exports from those countries. Today, much of the final assembly work is completed in Chinese factories, adding to China's trade surplus.
Still, even as the "Made in China" label grows ubiquitous, many of the most valuable pieces inside these products continue to be manufactured and designed elsewhere -- computer chips in Taiwan and Malaysia, liquid-crystal display panels in South Korea, computer software in Japan.
"China's trade surplus is a function of a fundamental imbalance of trade," Green said. "But in fact, these are not China exports: They are really Asian exports."
Special correspondent Eva Woo contributed to this report.
© 2006 The Washington Post Company
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