China's foreign reserves hit $1.33 trillion

BEIJING (Reuters) - China's foreign exchange reserves, the world's largest, swelled to $1.33 trillion by the end of the first half on the back of massive trade flows that contributed to an acceleration in money supply growth in June.

The central bank said on Wednesday that reserves had grown by $266.3 billion to $1.3326 trillion between January and June, in excess of the $247.3 billion reserves accumulation for the whole of 2006.

Analysts said the jump, which will have intensified upward pressure on the yuan CNY=CFXS, was largely in line with expectations given a widening in the country's trade surplus in the first six months.

"The figures are totally in line with expectations because the trade surplus surged very rapidly and we also expected FDI (foreign direct investment) to have been good," said Cheng Manjiang, an economist with Bank of China International in Beijing.

Suggesting a possible deceleration in the pace of reserves accumulation to come, Cheng said China's trade surplus was likely to narrow slightly in the second half of the year.

China's reserves expanded by $130.6 billion in the second quarter, the central bank said in a statement on its Web site (www.pbc.gov.cn), after staging a record quarterly jump of $135.7 billion between January and March.

That followed increases of $78.4 billion and $46.8 billion in the fourth and third quarters of 2006 respectively.

The country's reserves have ballooned in recent years as the central bank, in order to hold down the yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital.

FURTHER TIGHTENING

Inflows of capital into China have created flush liquidity conditions, exacerbating an investment and lending boom and making it harder for the authorities to curb money growth.

The government has waged a tightening campaign and has raised interest rates twice and required reserves four times this year to help mop up cash and hold down inflation.

Analysts said the pick up in broad money supply growth in June, to 17.06 percent from 16.7 in May, strengthened the case for more tightening measures in the weeks to come.

Annual loan growth hit an annual 16.25 percent in June from 16.0 in May while new yuan loans reached 2.54 trillion yuan in the first six months versus 3.2 trillion yuan for the whole of 2006 -- a development that the central bank described as being in keeping with the nation's economic situation.

"With a quickened pace in yuan lending and money supply, the possibility of another interest rate rise is increasing," said Li Mingliang, an analyst with Haitong Securities in Shanghai.

Suggesting some slowdown in the shift of money into the nation's heated stock market, bank deposits by households rose by 167.8 billion yuan in June after dropping a whopping 278.4 billion yuan in May.

Wednesday's data pointed to upside risks for both growth and inflation in China, Hong Liang of Goldman Sachs said in a note to clients. As a result, Goldman saw risks of more decisive policy tightening in the second half of this year.

(Additional reporting by Jason Subler)