China’s Forex Reserves, the Largest in the World

China forex reservesChina’s foreign currency reserves rose in the first quarter by $130 billion, reaching a record $3,440 billion, roughly the size of Germany’s economy as a result of massive capital inflows. The advance is the biggest for a quarter, since the period from April through June 2011.

Strong growth in foreign capital inflows marks a significant change from last year when money was sent out money from China. Return of foreign funds accelerated the domestic lending, according to authorities in Beijing.

Total new financing in the economy rose by 58% to 6,200 billion yuan ($1,000 billion) compared to the first quarter of 2012.

Fitch downgraded this week China’s sovereign credit rating, the first such decision by a major rating agency since 1999, because of fears that local authorities and companies have accumulated too much debt. Fitch had concerns regarding the nonbank financial sector (shadow banking), unregulated, which recorded an accelerated expansion in the first quarter.

The balance of loans in the banking sector grew by only 16% annually, but funding from outside the country doubled.

“The rise in foreign exchange reserves is a very clear sign that capital inflows are back,” said Shen Jianguang, an economist with Mizuho Securities. He added: “We will see more and more worries about this in the coming months because of the massive money printing in the US and Japan.”

The massive bond purchase program run by the U.S. Federal Reserve and Bank of Japan increased liquidity in the two countries, and some of these funds could come to emerging markets such as China.

China’s central bank has resorted more often to withdraw liquidity from the market in the last two months in order to limit the inflationary effect of capital inflows.

China’s economic growth slowed to 7.4% in the third quarter of last year, then increased to 7.9% in the last three months of 2012. It is expected to be around 8% in the first quarter of 2013.