China's foreign exchange reserves soared to a record of more than $3 trillion by end-March, while its money supply growth blew past forecasts, threatening to aggravate the nation's inflation woes and trigger more policy tightening. Chinese banks extended 679.4 billion yuan ($104 billion) in new local currency loans in March, while the broad M2 measure of money supply rose 16.6 percent from a year earlier, both above market expectations.
Tapping the brakes on money and lending growth has been a crucial part of Beijing's campaign to rein in inflation, which probably hit a 32-month high of 5.4 percent in the year to March, according to local media reports. After making progress at the start of the year in mopping up excess cash, the People's Bank of China appeared to lose some ground in March. "The latest numbers show that it is still too early for China to ease monetary tightening. China still needs to keep tightening policy at the current pace in coming months," said Qu Hongbin, chief China economist with HSBC.
Looking at the first quarter as a whole, the central bank has had some success in controlling loan issuance, said Liu Hongke, economist with CCB International Securities in Beijing. She noted that the 2.24 trillion yuan in new loans in the first three months of the year was about 30 percent of the government's full-year target, exactly in line with where it wanted to be at this stage.
"It shows the central bank is doing a good job," Liu said. But she added that China would need to raise banks' required reserves again very soon to absorb excess liquidity. China's inflation accelerated to as fast as 5.4 percent in March from a year earlier, Hong Kong media said on Thursday, reinforcing the government's vow to rein in price rises. Economists polled by Reuters had expected annual inflation in March to be 5.2 percent, up from February's 4.9 percent.