updated 1/15/2007 2:44:55 PM ET 2007-01-15T19:44:55

China's foreign exchange reserves, already the world's largest, have passed US$1 trillion, the government announced Monday, amid debate over how the country should use its newfound wealth.

The central bank said its reserves stood at US$1.0663 trillion at the end of December, up more than 30 percent from one year earlier, making this the first country officially to top the US$1 trillion mark.

China passed Japan in early 2006 as the nation with the biggest foreign reserves as Beijing drained money from its economy, stockpiling much of it in U.S. Treasuries in an effort to prevent a spike in inflation as export revenues surged in.

The figure announced Monday by the People's Bank of China was slightly below estimates by outside experts, who forecast that the reserves would surpass US$1.1 trillion by the end of 2006.

That mountain of money is equal to about 40 percent of China's annual economic output. Japan's reserves stood at US$875 billion at the end of December.

The composition of China's reserves is secret, but economists believe about 70 percent is in U.S. Treasuries, much of the rest in euros and a small amount in yen.

Purchases of assets in other currencies are believed to be growing as the bank diversifies its holdings.

Economist Stephen Green at Standard Chartered Bank in Shanghai said in a report last week that the central bank made an estimated US$29 billion profit last year due to its foreign reserves even after paying interest on its own bonds and other expenses.

The central bank has been buying up tens of billions of dollars worth of currency every month in order to keep the flood of money from China's trade surplus, which reached a record US$177.5 billion last year, from igniting inflation.

Beijing has begun easing currency controls in an effort to reduce such strains.

Economists are debating how China's reserves might be put to use to address pressing needs.

Some have suggested that Beijing use the money to buy oil and other resources abroad for China's booming economy. Others say it could pay for more schools and social programs.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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