* China data compound worries on inflation, policy
* Outstanding yuan loans up 17.9 pct yr/yr (f'cast 17.8 pct
* M2 money growth up 16.6 pct (f'cast 15.5 pct
* Foreign exchange reserves hit record $3.05 trillion
(Adds chart of top FX reserves holders)
By Kevin Yao and Langi Chiang
BEIJING, April 14 China's foreign exchange
reserves soared to a record of more than $3 trillion by
end-March, while its money supply growth blew past forecasts,
threatening to aggravate the nation's inflation woes and trigger
more policy tightening.
Chinese banks extended 679.4 billion yuan ($104 billion) in
new local currency loans in March, while the broad M2 measure of
money supply rose 16.6 percent from a year earlier, both above
Tapping the brakes on money and lending growth has been a
crucial part of Beijing's campaign to rein in inflation, which
probably hit a 32-month high of 5.4 percent in the year to
March, according to local media reports.
After making progress at the start of the year in mopping up
excess cash, the People's Bank of China appeared to lose some
ground in March.
"The latest numbers show that it is still too early for
China to ease monetary tightening. China still needs to keep
tightening policy at the current pace in coming months," said Qu
Hongbin, chief China economist with HSBC.
INFLATION PICKING UP
Looking at the first quarter as a whole, the central bank
has had some success in controlling loan issuance, said Liu
Hongke, economist with CCB International Securities in Beijing.
She noted that the 2.24 trillion yuan in new loans in the
first three months of the year was about 30 percent of the
government's full-year target, exactly in line with where it
wanted to be at this stage.
"It shows the central bank is doing a good job," Liu said.
But she added that China would need to raise banks' required
reserves again very soon to absorb excess liquidity.
China's inflation accelerated to as fast as 5.4 percent in
March from a year earlier, Hong Kong media said on Thursday,
reinforcing the government's vow to rein in price rises.
Economists polled by Reuters had expected annual inflation
in March to be 5.2 percent, up from February's 4.9 percent.
The website of Hong Kong's Phoenix TV, citing an
unidentified source, said annual inflation in March was likely
to be 5.3-5.4 percent, a 32-month high. Official data will be
released on Friday morning.
China has raised benchmark interest rates four times since
last October and has required the country's big banks to lock up
a record high of 20.0 percent of their deposits as reserves.
Economists polled by Reuters last week said that China was
heading for a pause in its half-year cycle of monetary
tightening, forecasting that it would raise interest rates just
once more this year.
FX RESERVES SURGE
A measure of the difficulties faced by China in taming
inflation came in the first quarter's nearly $200 billion
increase in its foreign exchange reserves, already the world's
biggest, to $3.05 trillion.
The rapid reserve build-up could indicate hefty capital
inflows given that China had a $1.02 billion trade deficit in
the first quarter-- the first quarterly deficit since 2004 --
which could complicate the government's fight against inflation.
"It could be a sign of strong capital inflows, which implies
that there will be room for more reserve requirement ratio hikes
and stricter credit control measures," said Connie Tse,
economist at Forecast Pte in Singapore.
Also, the dollar's broad weakening against major currencies
in recent months meant that the value of China's existing
reserves, which is expressed in dollars, was bound to increase.
The dollar hit a fresh 16-month low against a basket
of currencies on Thursday as expectations grew that the Federal
Reserve would keep monetary policy loose for some time.
China's vast forex reserves are often seen as a sign of the
strength of its economy, stemming in large part from its vast
trade surplus, but the rapid growth translates into money
creation and additional inflationary pressures at home.
"There have been stronger expectations of yuan appreciation
and faster hot money inflows in the first quarter," said Li Jie,
head of China forex reserves research centre at the Central
Universify of Finance and Economics in Beijing.
(Additional reporting by Aileen Wang and Koh Gui Qing; Writing
by Simon Rabinovitch; Editing by Kim Coghill)