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China’s foreign currency reserve passes $2 trillion

China has accumulated more than $2.13 trillion (£1.3 trillion) in foreign currency reserves, making it the world’s largest foreign currency holder and the first to have passed the $2 trillion mark.

This is more than double the amount Japan, which ranks second, has accumulated.

According to a statement published on the website of the People’s Bank of China, currency reserves have increased by 17.8% from June 2008.

Gareth Leather, the Economist Intelligence Unit’s analyst responsible for China, says China has accumulated a huge trade surplus and prevented its currency from floating feely, thus creating an imbalance.

“This is one of the causes for global imbalances and one of the factors to blame for the big problems,” he says.

In recent years, the Chinese government has bought dollar reserves to prevent its currency from appreciating, as this would hit the country’s export sector.

“At the moment, both the US government and the Chinese government are quite happy,” he says. “Politicians have put criticism for China’s foreign exchange policy aside.”

However, once the dollar depreciates, economic as well as political stability is at risk. For now, Leather says, it is unlikely that China will let its currency float feely. Unless its trade surplus comes down or its exchange rate will flow freely, China’s massive pool of foreign currency reserves will continue to increase.

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