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China’s forex reserves reach $3.44tn in first-quarter

Biggest quarterly rise since Q2 2011.

China’s foreign exchange reserves increased from $130bn to $3.44tn in the first quarter of 2013 due to surge in credit growth despite concerns about the level of debt in the economy.

The return of cash from abroad helped stoke fast credit growth in the first quarter, according to the Chinese government. Total new financing in the economy increased 58 per cent to Rmb6.2tn ($1tn) in the first quarter of 2012 compared to the same period a year ago.

Shen Jianguang, an economist with Mizuho Securities, told FT: “The rise in foreign exchange reserves is a very clear sign that capital inflows are back. We will see more and more worries about this in the coming months because of the massive money printing in the US and Japan.”

The Chinese central bank has stepped up liquidity withdrawals over the past two months to blunt the inflationary effect of the inflows.

Lu Ting, an economist with Bank of America Merrill Lynch, said the strong credit figures might add to fears about inflation, government debt and shadow banking. “China’s monetary policy makers are in a tough position to balance short-term growth-stability, market worries, and long-term economic health,” Lu said.

Zhou Xiaochuan, the central bank governor, said in March that he was on ‘high alert’ about inflation.

Ratings agency Fitch reduced the country’ sovereign credit rating last week due to worries that local governments and firms had racked up too much debt.

The rating agency, raising concerns about the rise in shadow banking, said that the rise in outstanding bank loans was 16 per cent year-over-year, but credit outside the formal banking system, including trust loans and corporate bonds, more than doubled, reported the Financial Times.

Economic growth in China declined to 7.4 per cent year-over-year in the third-quarter of 2012. But, it rebounded to 7.9 per cent in the fourth quarter of 2012.