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Money supply, reserves add yuan pressure

(Bloomberg)
Updated: 2007-04-13 20:25

China'smoney supply grewby more than the central bank's target for a second month and foreign- exchange reserves surged to a record $1.2 trillion, increasing pressure on the government to allow faster yuan gains.

M2, which includes cash and all deposits, increased 17.3 percent in March from a year earlier, the central bank said today. The currency reserves, the world's largest, grew 37 percent from a year earlier, the fastest pace since November 2005.

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Booming exports helped drive a $136 billion increase in the reserves in the first quarter, adding to a flood of cash that's made it harder for the government to avoid asset bubbles and inflation. China has raised interest rates and ordered banks to set aside more money as reserves, while resisting calls to loosen currency controls.

Faster yuan appreciation is "an essential tool to tighten overall monetary conditions," JPMorgan Chase & Co economist Wang Qian said inHong Kong.

The yuan has gained 7.1 percent against the dollar since the government ended a decade-old fixed rate in July 2005. The currency was little changed at 7.7255 at 5:30 p.m. inShanghai.

Printing Yuan

China's economy, the world's fourth-largest, expanded 10.7 percent last year, the fastest pace since 1995. The nation's trade surplus almost doubled in the first quarter to a record $46.4 billion. The currency reserves, a fifth of the world's holdings, grew about $1 million a minute over the three months. The increase was about half of the gain for all of last year.

China buys foreign currency to keep the exchange rate stable, boosting the money supply and raising the risk of bad loans and investment in factories that won't be needed in a slowdown. The central bank sells bills to soak up cash.

"The central bank has turned more hawkish" because of the oversupply of money, said Ma Jun, senior economist at Deutsche Bank AG in Hong Kong. Its bias will be toward tightening monetary policy "at least for the coming one to two quarters," Ma said.

China will raise interest rates at least once before the end of the third quarter, according to a Bloomberg News survey last month of 24 economists. The central bank increased the benchmark one-year lending rate by 0.27 percentage point to 6.39 percent on March 18 and has raised the amount of money lenders must set aside as reserves three times this year.

'People Expect More Tightening'

The increase in M2 money supply overshot the central bank's annual target of 16 percent. The median estimate of economists surveyed by Bloomberg News was for a 17 percent gain. The increase was 17.8 percent in February.