China's foreign exchange reserves jump massively

Beijing: China's foreign exchange reserves jumped $57.3 billion in February to $1.6471 trillion, almost matching January's surprising leap of $61.6 billion, two sources said.

The leap, which complicates the central bank's task of managing monetary policy, will fan talk of a continued surge in speculative hot money coming into China; the increase is more than three times greater than February's combined inflows from the trade surplus and foreign direct investment (FDI). These totalled $8.6 billion and $6.9 billion respectively.

Economists have offered various explanations for the $61.6 billion jump in reserves in January to $1.5898 trillion. Whatever the reason, the pace of accumulation in the first two months dwarfs last year's average monthly increase of $38.5 billion.

The reserves have ballooned because the People's Bank of China, in order to hold down the yuan, buys most of the dollars that flow into China.

The central bank then has to sterilise the impact on the money supply by mopping up the domestic currency it creates in the process. The jump in reserves will make this job harder.

Capital inflows

Tao Wang, Bank of America's economist in Beijing, said there was more than $100 billion of unexplained capital flows into China in the second half of last year. These may even have accelerated in recent months, Wang said in a report.

"Whether these inflows are 'hot money' or not, they validate the concerns on speculative inflows and the reluctance to increase interest rates aggressively," she said.

What's more, Wang said the inflows were likely to persist as expectations of a steady rise in the yuan make China even more attractive at a time of global financial turmoil and declining US interest rates.