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EYE ON CHINA: FX RESERVES
Keeping money at home

China's total foreign currency reserve increased by 418 billion USD in 2008, 44.1 Billion less than the increase in 2007 -with an increase of just 45 billion in Q4. Make no mistake - the stack of chips in front of China may be growing at a slower rate, but they are still the big money at the poker table and can still splash the pot at will.

As the pace of the stimulus measures picks up pace however, they may become more selective in the places they choose to hold their capital –with yesterday’s M2 figures released by PBOC saw broad money supply increased by 17.8% year-over-year with a 62% increase in new Yuan denominated loans and no signs of slowing pace, FX reserve growth rates could go negative in the coming quarters.

For now, China is still financing two separate stimulus packages, one at home and one in the US. As the “new normal” takes effect, the question of who calls the shots in international economic policy may well change. Creditors have a nasty habit of expecting to get their way.

Andrew Barber
Director