Chinese Foreign Currency Reserves Grow, Feeding Inflation

Posted July 12th, 2011 at 2:15 am (UTC-5)
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China says its foreign exchange reserves have risen to a record $3.2 trillion, boosting liquidity and contributing to the nation’s inflation headache.

The government’s attempt to tighten the monetary supply and lower inflation suffered another blow when new bank loans rose faster than expected last month.

The People’s Bank of China said Tuesday the country’s stockpile of U.S. dollars and other foreign currency rose $153 billion during the second quarter of 2011. Economists say that is due to an influx of foreign capital in the world’s second-largest economy.

Meanwhile, Chinese banks issued about $98 billion in new loans in June, up from the $85 billion figure posted in May.

Chinese policymakers have taken a number of steps to try to reduce the amount of money in the economy, including five interest rate hikes since last year. Despite the efforts, consumer prices in June were 6.4 percent higher than a year earlier, driven in part by a large spike in food prices.

Beijing has set its annual inflation target at four percent, fearing anything higher could contribute to social unrest.