China’s Forex Reserves Jump 23% To Record High

The People’s Bank of China has announced that China’s forex reserves surged to a record $2.399 trillion by the end of December 2009. This translates into a rise of 23%, or $453.1 billion, for what is already the world’s largest foreign exchange reserve.

In addition, data shows that Chinese banks lent 9.6 trillion yuan worth of loans last year, which is nearly twice the government’s target of 5 trillion yuan, and 30% of 2008 GDP. China’s forex reserves have grown at scorching rates mainly due to foreign investments, trade surpluses and inflows of short-term speculative funds. This also increases pressure on Premier Wen Jiabao’s campaign to avert asset-price bubbles. Wen’s cabinet pledged earlier this week that it will step up monitoring of speculative funds.

Liquidity is massive, and a note released by Goldman Sachs (NYSE: GS) suggests that one trillion yuan worth of lending has already been done this year. The recommended lending range for the year is 7-8 trillion yuan, as the nation also seeks to limit inflation risk.

It is expected that accelerating inflation will make authorities allow the yuan to appreciate slightly against the dollar, ending the 18-month peg of 6.83 yuan per dollar. However, this is a move that will have to be executed very carefully, as it may stoke further speculation. Officials are also trying to defuse fears of overheating in the economy, saying that exports recovery will be slow in 2010. The nation’s exports had surged by nearly 18% in December, ending a 13-month downward streak.

China’s tightening moves this week are not expected to have much of an impact on economic growth or corporate earnings, but the outlook for Chinese banks and property firms is particularly muddled.