China reserves rise to record US$1.9 trillion

“Hot money inflows have petered out on slower yuan rises and a perceived economic slowdown,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “The next issue is: how aggressive will the authorities be in easing rates? There’s scope for them to be a lot more active.”

Standard & Poor’s cited the currency reserves and the nation’s “strong fiscal position” when it upgraded China’s long-term debt rating to A+, the fifth-highest grade, on July 31.

China is grappling with how best to manage the reserves, forecast by the International Monetary Fund to reach US$2.2 trillion by the end of December and US$2.7 trillion by the end of 2009. Diversifying away from U.S. Treasury bills has brought losses.

China Investment Corp., the nation’s sovereign wealth fund, put money into Morgan Stanley and Blackstone Group LP before their stocks plunged. It also may have as much as US$5.4 billion frozen in a U.S. money-market account that suspended withdrawals last month.

Besides inflows of cash, the value of the reserves is affected by returns on investments and currency fluctuations.

The yuan remains Asia’s best performer against the dollar this year, rising 7 percent. The nation’s key one-year lending and deposit rates are 6.93 percent and 3.87 percent. Economic growth was 10.1 percent in the second quarter.

Money supply grew last month at the slowest pace in three years, the central bank said Tuesday.

M2, the broadest measure, increased 15.3 percent from a year earlier, compared with a 16 percent gain in August. The median estimate of 14 economists in a Bloomberg News survey was for a 16 percent increase.

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