WRAPUP 1-Cash floods into China, raising pressure on yuan

* FX reserves soar by quarterly record to $2.65 trln

* Sept trade surplus $16.9 bln (f/c $18.0 bln) vs $20.0 Aug

* New yuan loans 596 bln (f/c 500 bln) vs 545 bln in Aug

By Langi Chiang and Kevin Yao

BEIJING, Oct 13 (BestGrowthStock) – China’s foreign (Read more about foreign investment into China) exchange
reserves soared in the third quarter and its trade surplus
remained hefty, showing that the country is under both economic
and political pressure to let the yuan rise more quickly.

China’s stockpile of currency reserves, already the world’s
biggest, increased by $194 billion from July to September, the
most ever in a three-month period, to reach $2.65 trillion.

Although about a third of that rise could be explained by
valuation effects in the form of a weakening dollar, the
eye-popping number left little doubt that cash has been
flooding into China.

A rebound in exports was one main channel, but investment
and hot money inflows also powered the flows. Sustained yuan
appreciation since August and a bull run in the Chinese stock
market appear to be exerting a magnetic pull on investors.

“Foreign exchange reserves increased by too much in the
third quarter,” said Liu Dongliang, an analyst at China
Merchants Bank in Shanghai.

“We are caught in a dilemma. If the yuan exchange rate
continues to rise, more hot money will be sucked in. But we
have no better option right now and the yuan will continue to
ascend.”
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China trade surplus chart: http://r.reuters.com/hat28p

China money supply chart: http://r.reuters.com/kec38p

BV: Emerging markets, hot money:
http://r.reuters.com/byc87p

PDF:Currencies-race to bottom: http://r.reuters.com/gez77p

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Against a background of rising pique in the United States,
China has let the yuan climb more quickly in recent weeks,
making for total appreciation of 2.4 percent against the dollar
since it was unshackled from a nearly two-year peg on June 19.

DEALING WITH INFLOWS

In a sign that the People’s Bank of China is already
grappling with the problem of capital inflows, it raised
reserve requirements for six of the country’s biggest lenders
this week, a move that will help lock up about 200 billion yuan
of cash.

With the economy increasingly flush with liquidity, Chinese
banks were freer with their lending in September.

They extended 596 billion yuan ($89 billion) in new
local-currency loans in September, compared with August’s 545
billion yuan. Analysts had expected a rise of 500 billion yuan.

Beijing will have to redouble its controls on bank lending
to keep new credit issuance within its full-year target of 7.5
trillion yuan, an important part of its normalisation of
monetary policy after an unprecedented loan surge last year to
counter the global financial crisis.

“We expect the government will continue to control its
lending quota in the coming months to ensure it reaches its
full-year target,” said Wang Han, an economist with advisory
firm CEBM in Shanghai.

“The central bank will not raise interest rates this year,
because it believes the quantitative tools so far are
effective.”

TRADE SURPLUS DIPS

In another data release on Wednesday, China’s September
trade surplus dipped to a five-month low, but was still hefty
at $16.9 billion. Analysts had expected an $18.0 billion
surplus.

“The trade surplus is smaller than expected, but pressure
from the United States for yuan revaluation will remain strong
because it is an election year,” said Thio Chin Thio, a
currency strategist with BNP Paribas in Singapore.

Beijing did what it could to cast the latest figures in a
flattering light ahead of a U.S. decision due on Friday about
whether to formally declare for the first time that China
manipulates its currency.

In its release of the data, the General Administration of
Customs noted that that month-on-month import growth hit a
record high.

But there is little chance that this will silence critics
of Beijing’s managed exchange rate regime.

“Note that $145 billion in exports is only a fraction below
the July record high, so there will be plenty of ammunition for
those pushing China on the yuan at the G20 meetings,” said Sean
Callow, a currency strategist with Westpac in Sydney.

A G20 summit in Seoul in mid-November and U.S.
Congressional midterm elections earlier that month are
sensitive political dates, before which many analysts believe
China will push through faster yuan appreciation to blunt
foreign criticism.

A smaller Chinese trade surplus is seen as an essential
component of the rebalancing that is needed to put the global
economy on sounder footing.

While foreign critics often emphasise the importance of a
stronger yuan in achieving that goal, Beijing’s retort is that
this focus is too narrow. It says that a broader series of
reforms, such was building up the country’s welfare system,
will over time encourage more domestic consumption.
($1=6.673 Yuan)
(Additional reporting by Aileen Wang; Writing by Simon
Rabinovitch; Editing by Ken Wills)

WRAPUP 1-Cash floods into China, raising pressure on yuan