China still stockpiling foreign currency

NEW YORK (CNNMoney.com) -- In the latest sign that the Chinese could be keeping the yuan artificially undervalued, China's currency reserves jumped in the third quarter, to one of the highest levels on record.

China announced in June that it would allow yuan, which had been locked in value to the dollar since 2008, to begin trading more freely. And it has increased by a bit more than 2% versus the dollar over the last six weeks.

But Mark Williams, Senior China Economist for Capital Economics, said the Chinese report Wednesday of a $194 billion rise in the value of Chinese foreign currency holdings during the third quarter is one of the biggest on record and a sign that intervention by the People's Bank of China is far from over.

Part of that rise is due to the decline in the value of the dollar versus other freely traded currencies, such as the yen and the euro, during the quarter. But Williams estimates China made purchases of about $108 billion. He said it's proof that the Chinese are going to keep intervening in the markets to keep the yuan in check.

"They're intervening as strong as ever. It's not stepping back at all," said Williams.

He estimated Chinese currency purchases in each of the last three months were more than the $25 billion intervention by the Bank of Japan to try to lower the value of the yen in September, even though the Japanese action got much more attention.

China has been accused of keeping its currency, the yuan, undervalued by buying up foreign currencies. A lower value currency keeps exports cheap and competitive, giving manufacturers of that country an edge when competing for business.

Concerns about what the low value of the yuan means for U.S. manufacturers prompted Congress to pass a bill at the end of last month that would allow for tariffs on Chinese goods.

Tuesday night Treasury Secretary Timothy Geithner defended China's actions on currency, pointing out the rise in the value of the currency as a good first step.

"China, over the last six weeks or so, has started to let their currency appreciate at a pretty significant rate," he told PBS talk show host Charlie Rose.

Geithner said despite the interventions by China and Japan, he believes there is "no risk" of a so-called currency war breaking out between governments that would all be acting to keep the value of their currency low in order to promote their exports. But he did say the undervalued Chinese yuan is forcing a number of other developing countries to intervene as well to keep their currencies low.

"This issue, which people like to frame as uniquely an American preoccupation, is really much more important to the rest of the world and is really a global problem as a whole," Geithner said.

In a separate report, China, the world's biggest exporter, posted a $16.9 billion trade surplus for September, down 16% from August, but up by nearly a third from year-ago levels.

"I don't think a 2% rise in the currency or a slight drop in trade surplus will do much to satisfy Congress or China's critics," said Williams. "I think we'll see fairly rapid depreciation (in the yuan) over the next month or so leading up to the midterm elections and the G-20 meeting. But once those are out of the way, the pace of depreciation is likely to slow."

He estimates a 5-10% decline in the value of the yuan over the next year.