China sees foreign cash pile as possible peril, by David Lague

Old article, but I thought I’d bring it up as I see the RMB trading at 7.969.

Since 2002, China’s foreign exchange holdings have tripled in a clear measure of the scale of Beijing’s efforts to hold down the value of the yuan and lift the competitiveness of Chinese exports. To maintain the value of China’s currency, the central bank buys [it doesn’t “buy,” it exchanges] a big slice of the foreign currency flowing into China from exports, foreign investment and speculative capital.

So far, there appears to be little evidence that the accumulation of foreign currency would fuel inflation, according to analysts. These fears of inflation arise because the Chinese government prints local currency to pay for the foreign exchange it buys. However, to contain the threat of rapid inflation from the growth in the money supply, the government then sells debt to soak up or “sterilize” the yuan it issues. This appears to be working, with most economists satisfied that the growth in the money supply was in line with the expansion of the economy.

Related: Nice table of China’s foreign exchange reserves, 1977-2006