China’s reserves finally overhauled Japan’s in scale at the end of February, climbing to $853.7 billion, the country’s China Business News said yesterday. Official reserves figures are released only quarterly by the central bank, the People’s Bank of China, and are not due until the middle of next month.

Stephen Green, an economist with Standard Chartered, said that China’s vast stash of foreign assets now dwarfed that of Japan when measured as a share of each country’s gross domestic product. In cash terms Japan’s own reserves presently stand at $832 billion.

China’s reserves have increased by $17 billion a month on average during the past five months. At this rate, the holdings will top $1 trillion before the end of the year.

Key factors in the ballooning of the reserves has been the rapid growth in China’s exports, together with its continued intervention in foreign exchange markets to thwart any strengthening in its yuan currency.

To restrain the yuan, the central bank has bought most of the dollars generated by a growing trade surplus and inflows of foreign direct investment and speculative capital.

Mr Green said: “To maintain the currency at this level, the central bank has to buy up foreign currency.” He estimated that China was currently trading between two and three billion dollars a day. The foreign reserves are now so large that China is believed to be shifting more of its increasing holdings into euros and yen to reduce its exposure to dollardenominated assets.

James Malcolm, currency strategist at Deutsche Bank in Singapore, said: “To maintain a similar portion of euros and yen in their portfolio they need to sell dollars.” He said that if China allowed its currency to rise significantly it would have some impact on the size of the reserves.

Economists believe that the reserves are held between 70 per cent and 80 per cent in dollars, although Mr Green described the breakdown as China’s most closely guarded secret after its nuclear arsenal.

China has continued to invest a large part of its huge reserves in US bonds and assets. It held $262.6 billion in US government treasury bonds at the end of January, making it the largest single investor after Japan. By pumping up demand for treasuries, China’s buying of the bonds has helped to drive down market interest rates in the American economy. But China’s continued intervention to keep the yuan competitive, the scale of its trade surplus with the US, and fears over the leverage that its holdings of American assets might give Beijing are all a source of friction with Washington.

In the latest symptom of those tensions, two US senators, Charles Schumer and Charles Grassley, said yesterday that they would introduce a Bill into Congress that threatens to impose a 27.5 per cent tariff on China’s exports to the US if Beijing does not revalue the yuan. This came despite the Chinese currency reaching its highest level since it was revalued by 2.1 per cent last July, at 8.0205 to the dollar.

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