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China's foreign reserves hit $854 billion

/ Source: The Associated Press

China’s foreign currency reserves reached $853.7 billion by the end of February, likely topping Japan’s to become the world’s largest, a state-run newspaper reported Tuesday, citing an unnamed source.

Japan’s foreign currency reserves — the amount of foreign currency a government holds in its accounts — totaled $850 billion at the end of February, Tokyo announced earlier.

Chinese central bank officials refused comment on the latest figures, reported in the newspaper China Business News, saying data on foreign exchange reserves are only released quarterly. Those figures are due to be issued in mid-April.

China’s foreign currency reserves rose 34 percent in 2005 to a record high $818.9 billion amid surging exports. At current rates of growth, Beijing’s foreign exchange reserves could reach $1 trillion this year.

Foreign reserves have soared as China’s ballooning exports have brought home billions of U.S. dollars and other foreign currencies. China’s global trade surplus last year reached $101.9 billion, up from $32 billion the year before.

China’s foreign currency regulator buys dollars and other foreign currencies that come into the economy and stockpiles them in U.S. Treasury bonds and other assets in order to limit incoming currency flows, which it worries could set off inflation.

Analysts estimate that three-quarters of China’s reserves are in U.S. Treasuries, reflecting the dominance of the dollar as a reserve currency.

China’s widening trade gap is intensifiying pressure from the United States and other trading partners for Beijing to loosen controls on its currency that critics contend keep it undervalued by up to 40 percent, giving Chinese exporters an artificial advantage.

After keeping the yuan’s value steady for more than a decade, China revalued it by about 2 percent last July and cut its peg to just the U.S. dollar, linking the yuan instead to a group of currencies. But tight restrictions keep the yuan trading within a narrow band: it has gained only about 1 percent since July.

Chinese leaders say they plan eventually to let the yuan trade freely on world markets, but they say doing so immediately will cause financial turmoil and damage the Chinese economy.

Chinese companies have adapted well to recent currency adjustments, clearing the way for the market to play a bigger role in determining exchange rates, China’s central bank governor, Zhou Xiaochuan, said in comments published Tuesday in the state-run newspaper Economic Daily.

“We think (we) can allow market supply and demand to gradually bring about a greater effect on the exchange rate float,” Zhou said in comments confirmed by staff at the People’s Bank of China.