China's forex stockpile hits record $1.8 trillion - MarketWatch

China's forex stockpile hits record $1.8 trillion - MarketWatch: "China's forex stockpile hits record $1.8 trillion
By Chris Oliver, MarketWatch
Last update: 6:04 a.m. EDT July 14, 2008

China's forex stockpile hits record $1.8 trillion
By Chris Oliver, MarketWatch
Last update: 6:04 a.m. EDT July 14, 2008
Comments: 13
HONG KONG (MarketWatch) -- China's foreign-exchange reserves climbed $126.6 billion in the April-to-June quarter, lifting total reserves to $1.81 trillion, according to data released by the People's Bank of China Monday.
In the six months to June, total foreign exchange reserves grew $280.6 billion, or 18.4%.
During the previous 12 months, foreign exchange reserves have risen 35.7%.
Foreign exchange reserves expanded a modest $11.9 billion in June, down from the monthly average of $54 billion in the first five months of the year.
Kevin Lai, senior economist with the Daiwa Institute of Research in Hong Kong, said the decline in reserve accumulation is linked to a new regulation by the PBOC requiring commercial banks to meet all or part of the recent addition in reserve requirements by depositing U.S. dollars, rather than yuan, at the central bank.
The central bank boosted the ratio of reserves banks must keep on deposit at the central bank by one percentage point last month. Under this new system of lodging deposits, the assets appear on the central bank account as foreign assets and do not require the central to print offsetting yuan to purchase the dollars.
"Base money is still growing by 40% year-on-year and this is too high," Lai said.
China's money supply, as measured by M2, which covers cash in circulation and all deposits, totaled 44.31 trillion yuan ($6.49 trillion) at the end of June, up 17.4% in June from a year earlier.
Lai said the rapid growth in money supply is feeding a surge in bank lending, with new loan issuance averaging 392 billion yuan in the first six months of the year. In order to maintain its target of capping total new loan issuance at 3.6 trillion yuan this year, the PBOC must curtain new bank lending to monthly average of 214 billion yuan in the second half.
"It will be a lot more difficult for banks to follow," Lai said.
Lai added Chinese authorities stand to lose on the battle with inflation if they can't bring money supply growth back into more reasonable growth levels. End of Story
Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.