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China's Currency Reserves Have Surpassed Japan's; Japan Cuts Development Loans to China

NAM cites possibility of currency manipulation in China; Japan to cut China loans due to strained ties

Reacting to data released earlier this week showing that China’s foreign currency reserve holdings are now the largest in the world, the National Association of Manufacturers (NAM) commented that Chinese reserves have now surpassed those of Japan. 

“At $848 billion, China’s reserves have now grown beyond the $837 billion held by Japan,” said NAM Director of International Commercial Affairs Patricia Mears. “And remember, Japan’s economy is two-and-a-half times larger than China’s. 

“What’s more, China’s currency reserves are nearing half of China’s total gross domestic product.  Rather than tying up that much of its economy in low-interest official holdings – primarily in U.S. dollars – China could be using those funds to build internal economic strength,” Mears observed. 

“China continues to buy dollars to keep its currency suppressed below market values in order to fuel export-led growth,” she said, “but it’s high time for this to stop.  It’s distorting global trade flows and distorting China’s economy.

“China’s currency reserves grew $220 billion in the past 12 months alone,” reported Mears.  “Not coincidentally, that was the size of its trade surplus with the United States last year." 

She pointed out that the Treasury Department’s semi-annual report on currency manipulation is due later this month.  “In light of this latest evidence of massive one-way dollar purchases, it’s imperative that Treasury conclude that China is manipulating its currency.  In addition to drawing that conclusion officially, it is essential that Treasury work with other governments to convince China that the time has come to stop this harmful practice,” Mears concluded. 

In a related development, as posted on Bloomberg.com, Japan's government will cut development loans to China by 10 billion yen ($85 million) from a year earlier because of the strained ties between the countries, according to an article in the Yomiuri newspaper.

The government will cut the loans to about 75 billion yen, the Yomiuri said, citing government officials it did not identify. The loans were earmarked in the fiscal year ending March 31 but haven't been approved by the cabinet. The government will approve the loans in May after considering how China deals with "bilateral issues,'' the article said.

Japan will delay advancing new development loans to China at least until this fiscal year that started on April 1 because of deteriorating relations between the two countries, Chief Cabinet Secretary Shinzo Abe said on March 23.

Ties between the countries have worsened in recent years because of Japanese Prime Minister Junichiro Koizumi's visits to a Tokyo shrine that includes 14 war criminals among the dead it honors and a dispute over gas drilling rights in an area in the East China Sea that is claimed by both.

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