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Climb in forex reserves dips

CHINA'S foreign exchange reserves rose US$417.8 billion in 2008, but it was US$44.1 billion less than the increase in 2007, the People's Bank of China, the central bank, announced yesterday.

This is the first time China has seen a decline in the growth of its forex reserves since 1998. The forex reserves increased nearly US$45 billion in the fourth quarter to US$1.95 trillion by the end of 2008, the central bank said in a report.

The rise in reserves had been slowing in 2008. The total forex reserves at the end of 2008 climbed 27.34 percent from the end of 2007. The growth rate from from January to June was 35.37 percent, while from January to September it was 32.92 percent.

The growth slowdown was a result of a shrinking trade surplus and a possible slowdown in "hot money" flows, analysts said.

Despite the slower growth in forex reserves for the whole year, the monthly reserves for December increased by US$61.3 billion, a rise of US$30 billion from the same month in 2007, according to the central bank.

According to Guo Tianyong, a professor at Central University of Finance and Economics, expectations for a weaker yuan and outflow of capital from the Chinese market to ease capital supply pressure in the West were major factors leading to the drop in foreign exchange reserves in the fourth quarter.

December saw a sharp rise in forex reserves as the Central Economic Work Conference in early December pledged to keep the yuan stable based on a reasonable and balanced level, which reversed the expectation for a weaker currency, he said.

China has been concerned about "hot money" brought into the country by businesses and individuals betting on the continuous rise of the yuan. There are concerns that such flows would create asset bubbles, fuel inflation, put further appreciation pressure on the currency and make the domestic financial system vulnerable.

With the de-leveraging of financial markets in developed countries since the financial crisis broke out, hot money flows into China began to dry up, said analysts.


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