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China's foreign reserves surge as hot money pours in

July 15, 2009 |  2:01 am

China's foreign exchange reserves topped $2 trillion in June -- a new high -- fueled in part by foreign money inflows as global investors bet the economy would stay on a strong growth track.

From Bloomberg News:

The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People's Bank of China said today on its website.

People's bank of china HQ “Hot money is flowing back,” said Sherman Chan, an economist with Moody’s in Sydney. “China has the strongest prospects out of all major economies.”

The trade surplus was $34.8 billion in the second quarter and foreign direct investment was $21.2 billion, leaving the bulk of the increase in the reserves unaccounted for. Investment returns and currency movements also affect their size.

“The capital inflows have driven up stock and property prices,” said Yang Shengkun,a currency analyst in Beijing at China Citic Bank Co. “Speculators are favoring China because the government’s stimulus package is working quite well, which will help the country to be the first to recover globally.”

China's stock markets have soared this year and bank lending has rocketed as the government has pumped money into the economy to maintain growth, even as much of the rest of the world has fallen into a deep recession.

The market and banking-system booms also have fueled fears that Beijing is inflating a dangerous bubble. But if so, this is one bubble the rest of the planet should be grateful for at the moment, given the lack of any other significant force to pull up the global economy.

-- Tom Petruno

Photo: People's Bank of China headquarters in Beijing. Credit: Gao Xueyu / Associated Press