| GEO Business|
| China forex reserves hit record $2.13 trln: bank|
| Updated at: 1945 PST, Wednesday, July 15, 2009|
BEIJING: China's foreign exchange reserves surged to a record 2.13 trillion dollars at the end of June, according to the central bank, as money poured into the country while the economy strengthened.
The reserves, already the world's largest, grew by 185.6 billion dollars in the first six months of 2009, a rise of 17.8 percent year-on-year, the bank said in a statement.
The figure was the highest reported by the bank. Foreign exchange reserves were 1.95 trillion dollars at the end of the first quarter of 2009.
The nation's forex reserves have ballooned in recent years, fuelled by robust foreign investment, a hefty trade surplus and inflows of "hot money" or short-term speculative funds in search of quick profits.
The inflow eased as the economic crisis hit late last year, but the latest figures showed the trend was resuming.
"Overall, with China's economy recovering and asset prices rising, China is becoming more attractive to foreign investors, which leads to capital inflows," said Su Chang, an economist with Beijing-based consultancy the CEBM Group.
"China's real estate market has rebounded, also attracting overseas investors who are allocating capital (for such investments)."
The nation's foreign exchange reserves rose by 42.1 billion dollars in June alone compared to May's figures.
The month-on-month rise was 30.2 billion dollars more than the increase in June last year, according to the central bank.
Ting Lu, a Hong Kong-based economist with Merrill Lynch, said the sharp rise was chiefly attributed to the Chinese economy recovering more quickly and maintaining higher growth rates than many in the developed world.
"The return of foreign capital is understandable because asset prices, stocks and properties in China have been outperforming most other markets," Ting said.
But Su said the spike in capital inflows was not all good news for the government.
"One of the concerns is that real estate prices may be rising too fast, if the prices rise too fast, it will become a political issue and the central government will face more pressure," Su said.
Other economists also warned of risks.
"China's forex headache has returned," Standard Chartered China economist Stephen Green said in a research note.
"Hot money... may be back, encouraged by super loose credit and numerous signs of bubbles forming."
China's trade surplus was down 1.3 percent to 96.9 billion dollars during the first six months of 2009, according to previous government data.
And foreign direct investment dropped 17.9 percent to 43 billion dollars over the same period, the commerce ministry said Wednesday.
With the trade surplus and foreign direct investment far lower than the growth in forex reserves, hot money is clearly flowing in to the country.
Analysts said this may prompt the government to respond with some form of monetary tightening.
China has invested a large part of its vast reserves in US dollar assets, such as safe but low-yielding US Treasury bonds, but amid the financial crisis Beijing has tried to diversify its investments to improve its returns.
With the United States and the world economy still reeling from the crisis, China has also called for the creation of a new international reserve currency to replace the dollar.
China's forex reserves stood at 1.946 trillion dollars at the end of 2008.