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China's forex reserves surpass US$2 trillion

CHINA became the world's only country with foreign exchange reserves surpassing US$2 trillion in June, the central bank said yesterday.

Forex reserves picked up growth in the second quarter despite decreasing trade and foreign direct investment, indicating a resumption of major capital inflow into China, the People's Bank of China said.

Meanwhile, M2, the broadest measure of money supply, surged at an unexpected record pace of 28.5 percent in June, up from the 25.7-percent rise of May.

China's forex reserves grew by 18 percent year on year to US$2.13 trillion at the end of June, the central bank said.

"The second-quarter forex reserves reverse much of the apparent outflows in the first quarter," said Ken Peng, a Citibank economist.

Forex reserves leapt by US$177.8 billion in the second quarter, contributing to the majority of new reserves in the first half which totaled US$185.6 billion.

The forex reserve accumulation exceeded the sum of trade surplus and foreign direct investment inflows by US$122 billion in the second quarter, indicating that speculative money may have returned to China on the back of the country's recovery.

China's trade and FDI showed softening signs but still dropped.

FDI fell 6.8 percent from a year earlier to US$8.96 billion in June, the ninth straight monthly decline, from a 17.8-percent decrease in May, the Ministry of Commerce said yesterday.

China attracted a total of US$43 billion in investment from overseas in the first half, down 17.9 percent from the same period of last year.

"This forex surge was probably driven by portfolio inflows and likely contributed to the rally in stock and property markets," said Peng. "Future inflows are likely to be less aggressive, given more stable financial markets."

China surpassed Japan as the world's biggest forex reserves holder in February, 2006.

Banks in China extended 7.37 trillion yuan (US$1.08 trillion) of new yuan-backed loans in the first half, up 4.92 trillion yuan from a year ago.

Rapid growth of bank lending, amid a relatively easing monetary policy and a 4-trillion-yuan stimulus package, have already spurred activities in the broader economy.

China's exports, the hardest hit by the global financial fallout, fell 21.4 percent year on year to US$95.4 billion in June, moderating from the reductions of 26.4 percent in May and 22.6 percent in April.

China's trade surplus dropped 0.5 percent to US$96.93 billion in the first half, with moderating signs.

Fixed-asset investment and industrial production continue to expand, while imports have recently been more robust than exports.

However, economists are concerned about the likelihood of a bad loan surge, high-rising asset prices and a possible inflation spike.

"Although China's monetary stimulus has been helping the real economy, it appears to have had a greater impact on asset prices," said Alaistair Chan, a Moody's associate economist.

China's stock market is the world's best performer, with the benchmark Shanghai Composite Index surging 75 percent this year. The real estate market is also picking up strength.

"Whether this will filter into consumer and business prices is, frankly, anyone's guess, but clearly the risks are growing," Chan said.


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