China’s Reserves Expand

Investors are pouring money into China at a rate of tens of billions of dollars a month, new official figures show, a trend that poses a challenge for a government increasingly concerned about inflation risks.

China’s central bank said that its reserves of foreign currency, by far the world’s largest, rose to $2.4 trillion at year-end, an increase of $126.56 billion since September. The reserves grow when the central bank buys foreign currency coming into the country, which it regularly does in order to steady the value of the yuan. The yuan it spends to buy that foreign cash, in turn, adds to funds sloshing around in China’s banking system, which the central bank has started taking some steps to control.

China remains a hugely attractive place to put money: It is growing faster than almost any other country, has a booming property market and is widely expected to resume letting its currency appreciate this year. Foreign direct investment—the money companies spend on their operations in China—more than doubled from a year ago to $12.14 billion in December, separate figures show.

“As long as money comes in, it’s my belief that it will be increasingly difficult for the central government to control the domestic money supply and inflationary pressures,” said Logan Wright, a Medley Global Advisors analyst. Aside from officially recorded foreign investment, he estimates $30 billion to $40 billion of unrecorded capital inflows—sometimes dubbed hot money—came into China in the fourth quarter, a similar rate as in previous quarters.

The continued capital inflows risk complicating Beijing’s recent efforts to dial back the record lending boom it unleashed to cope with the financial crisis. The central bank published other figures showing Chinese banks extended a total of 9.59 trillion yuan (about $1.4 trillion) in 2009, nearly twice the 4.9 trillion yuan in 2008 and a figure equivalent to nearly a third of the country’s expected economic output for the year.