China's World-Record Currency Reserves May Top $2 Trillion for First Time

China’s foreign-exchange reserves probably topped $2 trillion for the first time, drawing attention to the difficulty the government faces in finding places to invest the world’s largest holdings.
The reserves climbed $67.8 billion to $2.022 trillion as of June 30 from three months earlier, according to the median estimate of six economists surveyed by Bloomberg News. That would compare with a $7.7 billion gain in the previous quarter. The central bank may release the number today or next week, based on the timing of previous announcements.
Central bank Governor Zhou Xiaochuan ruled out any sudden change in the management of the reserves last month after proposing that governments investigate setting up a supranational currency. Premier Wen Jiabao is concerned that China’s $763.5 billion of Treasury holdings may fall in value as the U.S. sells record amounts of debt to fund stimulus spending.
“There’s no obvious alternative for China to U.S. Treasury bills,” said Stephen Green, head of China research at Standard Chartered Plc in Shanghai. “The alternatives are limited for that much money.”
China’s reserves more than doubled in two and a half years as the trade surplus pumped cash into the economy, fueling claims that the nation’s currency is kept artificially low to help exporters. The International Monetary Fund may describe the yuan as “substantially undervalued” in a pending report, according to a person who has seen the draft.
Obama, Geithner
President Barack Obama is counting on China’s support as he sells debt to fund his $787 billion economic stimulus plan. Treasury Secretary Timothy Geithner said during a visit to Beijing on June 2 that Chinese officials expressed “justifiable confidence” in the strength of America’s economy.
China will continue to buy Treasuries because alternatives are too risky or won’t soak up enough money, said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.
Kowalczyk also highlighted political opposition around the world to Chinese investment, citing miner Rio Tinto Group’s rejection of Aluminum Corp. of China’s proposed $19.5 billion investment. The scrapping of the deal was followed by Chinese allegations that Rio staff stole state secrets.
China Petrochemical Corp. is spending $7 billion to acquire Geneva-based Addax Petroleum Corp. and secure oil reserves in Iraq’s Kurdistan region and West Africa. China’s sovereign wealth fund, meanwhile, has lost money on investments in Blackstone Group LP and Morgan Stanley.
‘Hot Money’ Inflows
The latest gain in the reserves was probably driven by the trade surplus, higher valuations for non-dollar assets because of the U.S. currency’s weakness, and inflows of speculative capital, or so-called “hot money,” Kowalczyk said, adding that investors are attracted by an economy that’s growing when others are shrinking.
China’s benchmark Shanghai Composite Index has soared more than 80 percent from last year’s low on Nov. 4. The government kept the yuan stable in the past year after the currency gained 21 percent against the dollar between July 2005 and July 2008.