China's foreign exchange reserves, already the world's largest, surpassed 1.33 trillion dollars at the end of June, the central bank said Wednesday.

At 1.3326 trillion dollars, the reserves were up 41.6 percent from 12 months earlier, the People's Bank of China said in a statement on its website.

A total of 266.3 billion dollars have been added to the reserves in the first half of 2007, 144 billion more than a year ago, the bank said.

The six-month rise is higher than the full-year rise of some 247 billion dollars in 2006.

"A large-scale forex reserve may backfire," Wang Yuanlong, an economist with the Bank of China, was quoted by the state Xinhua news agency as saying.

"It is the major reason leading to the excess liquidity in China."

The announcement came one day after China said that its trade surplus for June had soared 85.5 percent to hit a record monthly high of 26.91 billion dollars.

China's soaring trade surplus is one of the main factors contributing to the bulging forex reserves.

China's top economic planning agency said in May that the trade surplus was likely to hit 250-300 billion dollars in 2007, up from a record 177.5 billion dollars last year and a massive increase from 31.98 billion dollars in 2004.

The surplus has been a constant source of friction with its major trading partners, mainly the United States and the European Union.

Some 70 percent of China's forex reserves are believed to be in US dollar-denominated assets, typically in relatively low-yielding Treasury bonds.

This exposes China to a financial loss due to the steady decline of the US currency.

As part of its efforts to maximise returns, the government is preparing to set up a state-controlled investment firm, which will reportedly manage a fifth of the forex reserves.

The finance ministry is expected to soon issue 1.55 trillion yuan (204 billion dollars) in bonds to fund the new investment agency, state media said earlier this month.

The decision to issue the bonds follows persistent calls from officials to diversify the huge reserves.

Even before the company has been formally established, China has agreed to invest three billion dollars of the reserves under its management in US private equity firm Blackstone.