Chinese foreign reserves reach $1trn

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China has passed another major milestone in its economic development, accumulating $1 trillion of foreign currency reserves. The news was announced yesterday by Chinese state television.

The reserves hit $987.9bn at the end of September and have been expanding at such a rapid pace that they had been expected to surpass $1 trillion (£520bn) at any time.

The achievement will be seen as another sign of the imbalances in the global economy that bodies such as the International Monetary Fund fear could eventually trigger a slump.

The IMF has said that the reserves will top $2 trillion in 2010, with the vast majority of the liabilities being held by the United States.

It will also fuel calls in the US for China to revalue its currency, the yuan, that was pegged to the dollar for a decade, and then allowed to float within a tight range last year.

Julian Jessop, the chief international economist at Capital Economics, said China was running a trade surplus, particularly with the US, and had a policy decision to put the money into its reserves.

"It is a reflection of the underlying imbalances in the world economy," he said. "The fact that they are increasing at such a rapid pace also creates problems for the domestic monetary policy."

Some 70 per cent - or around $700bn - is held in US assets, particularly bonds, which has helped drive down interest rates. However, if China suddenly diversified its holdings, that could cause a major shock.

Rob Carnell, a currency analyst at ING Financial Markets, said critics in the US should bear in mind that some of the money flowing into China was being used by speculative investors to bet on a sudden 10 per cent revaluation of the yuan.

"The typical argument is 'let's bash China' and complain about their exchange rate being under-valued," he said. "But it is not just about the current account surplus."

He said China was running a deficit with the rest of Asia and Australasia, implying that its currency was overvalued with some parts of the world.

Mr Jessop said the surplus could be seen as "rather nice" for China as it gave it the opportunity to recapitalise the country's welfare system. This might give consumers enough confidence in their retirement prospects to spend more on imports and reduce the trade deficit.

Roger Bootle, chief adviser to accountants Deloitte, said the accumulation of savings in China had created a great opportunity for London as a financial centre. He played down the threat that financial centres in India and China would pose to the City.

He said: "If anything, as countries like China and India get richer, they will turn to London to fulfil their mushrooming need for international financial services."

... but corruption still a big problem

By Philip Thornton

China has been given a low ranking in terms of both its business environment and its exposure to corruption, according to two global studies published yesterday.

The Communist behemoth was given a "medium" security risk by Control Risks, a consultancy, ranking it alongside Iran and Burkina Faso.

Meanwhile, Transparency International ranked China among the three-quarters of nation states that it rated as facing a "serious level" of domestic corruption.

The reports will be seen as a reminder that China still faces many problems associated with developing countries despite its imminent ascendancy to the top of the economic league table.

Control Risks said China was at a crucial turning point in its development that could deliver significant improvements as a place to do business.

"We will start to see a rebalancing of China's policy of market liberalisation, resulting in even greater competitiveness," its annual report said.

It said Beijing would enshrine a more socially responsible approach to liberalisation. "This will ultimately provide a more stable investment environment," it said.

The main focus of the TI report was on the link between poverty and corruption. It said all low-income countries and all but two African ones had serious problems, while in 71 out of 163 states corruption was "rampant".

Iraq has sunk to second-to-last place from 137th in the 2005 survey, with pre-war survey data no longer included in the index.

TI said that bribes offered under the UN's oil-for-food programme continued to play a central role in driving corruption. Iraq has an "extreme" security problem, according to Control Risks.

Hilary Benn, the UK's International Development Secretary, said: "We have to recognise that, where there are bribe-takers, there are also bribe-givers. They can include people from other countries trying to do business corruptly.

"That's why DFID is providing funding to increase the capacity of the Metropolitan Police and the City of London Police to investigate cases of money laundering and foreign bribery."

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