Currency Reserves Held by Beijing Continue to Swell
HONG KONG -- China's foreign-exchange reserves ballooned to $818.9 billion at the end of last year, putting the country on the road to hitting the $1 trillion mark and claiming the world's largest reserves this year. The expanding coffers will likely add to pressure from the U.S. for Beijing to speed up appreciation of its currency.</br></br>For China, the reserves are in some ways an embarrassment of riches. They draw unwelcome attention to Beijing's policy of maintaining exchange-rate stability by buying up most of the dollars that flood into the country in the form of foreign direct investment, export earnings and speculative capital. Critics in the U.S. and Europe complain that this practice gives Chinese exporters an unfair advantage on world markets by making the Chinese yuan artificially cheap.</br></br>Partly in response to U.S. pressure, Beijing allowed a 2.1% appreciation of the yuan against the dollar last July and pledged to make its exchange rate more market-driven. However, since that time, the yuan has edged up only by a further 0.52%. It last traded on Friday at 8.0698 to the dollar.</br></br>Coupled with other evidence of breakneck economic growth in China, the buildup of reserves "is definitely helping Western countries to add pressure on China" for currency appreciation, said Grace Ng, a senior economist at J.P. Morgan.</br></br>To China's critics, the figures provide evidence that the economy can withstand a stronger currency. If, as expected, the country's reserves leap by a similar margin this year, taking the total over the $1 trillion threshold, economists say Beijing will find it harder to resist pressure for faster currency appreciation from the U.S. and other major trading partners and still avoid a protectionist backlash.