China’s foreign-exchange reserves top $2 trillion

China’s foreign-exchange reserves, the world’s biggest, topped $2 trillion for the first time as the nation’s economic recovery prompted overseas investors to pump money into stocks and property.

The reserves rose a record $178 billion in the second quarter to $2.132trl, the People’s Bank of China said today on its Web site. That dwarfs a $7.7bn gain in the previous three months.

The Shanghai Composite Index, the world’s second-best performer, surged 74 per cent this year as Premier Wen Jiabao’s stimulus package triggered record lending and surging investment. The increase in the reserves means China may buy more U.S. Treasuries as the Obama administration sells record amounts of debt to fund its own plan for reviving growth.

“Hot money is flowing back,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “China has the strongest prospects out of all major economies.”

M2, the broadest measure of money supply, rose a record 28.5 per cent in June from a year earlier, the central bank said.

The yuan traded at 6.8325 against the dollar as of 12:39 p.m. in Shanghai, from 6.8329 yesterday.

The central bank has used bill sales to push up money- market rates for three weeks, seeking to tighten monetary policy without choking off a recovery as the surge in money supply increases the risk of asset bubbles, bad loans and resurgent inflation.

‘Great Challenges’

“The pace of foreign-exchange inflows will accelerate in coming months as China’s recovery attracts investors, and that will pose great challenges for monetary policy,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai.

The trade surplus was $34.8bn in the second quarter and foreign direct investment was $21.2bn, leaving the bulk of the increase in the reserves unaccounted for. Investment returns and currency movements also affect their size.

Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong, saw speculative capital and higher valuations for non-dollar assets as the biggest factors. Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, said speculative capital may have accounted for $50bn of the increase and gains by the euro for $35bn.

“The capital inflows have driven up stock and property prices,” said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co. “Speculators are favoring China because the government’s stimulus package is working quite well, which will help the country to be the first to recover globally.”