China’s net international investment position (IIP) more than doubled last year, largely as a result of its fast-growing economy and an improved international clearing capacity.

China’s net IIP, or overseas financial assets and direct investment minus such liabilities, was US$287.5 billion at the end of 2005, surging by 138 per cent from a year earlier, according to figures released yesterday by the country’s top foreign exchange body, or State Administration of Foreign Exchange (SAFE).

This is the first time China has published its IIP figures, which the administration said would help complete its macroeconomic statistics, assist macro policymaking and analyze the global financial capital situation.

China ranked sixth largest in terms of net IIP for 2004, and last year’s sharp increase is bound to push its ranking up further, SAFE said.

“China’s international investment position reflects its achievements of opening up and economic development in the past nearly 30 years, indicating the opening up is broadening, (there is a) closer connection with the world economy, and economic strength is improving,” a SAFE spokesman said.

The administration said the growing stockpile of net assets gives China a strong capacity to repay foreign debts, underlining the liquidity and ability to control foreign exchange reserves that make up the bulk of foreign assets and the stability of inward foreign direct investment.

“Such a structure will help prevent financial risk, and has a positive effect on China’s financial stability,” the spokesman said.

Driven by a huge trade surplus and growing capital inflows partly fuelled by expectations for a stronger local currency, China’s forex reserves shot up to US$818.9 billion at the end of last year from US$609.9 billion a year earlier. Forex reserves accounted for an overwhelming 68 per cent of China’s foreign financial assets at the end of last year, and 71 per cent of the 2005 increase in foreign financial assets.

While the growing forex reserves serve to ensure the nation’s international clearing ability, they have complicated monetary policymakers’ job of containing local money supply to harness inflationary pressures and rapid loan growth. They mop up excess dollars to enforce the trading band of the renminbi by issuing new cash, subsequently increasing local money supply.

Government officials have repeatedly said China is not pursuing a huge forex stockpile, and has been taking measures to reduce surpluses.

Source: China Daily