Banking

China’s foreign exchange reserves, already the world’s biggest, soared again in the second quarter, adding to inflationary pressure and highlighting the risks in Beijing’s policy of holding down the value of its currency.

Reserves are a key indicator of central bank intervention in the currency market because they reflect how much foreign exchange it has purchased in order to stabilise the renminbi. After jumping $197bn in the first quarter, reserves were up another $153bn in the second quarter.

That influx of cash compounds China’s inflation troubles. Consumer prices were up 6.4 per cent in the year to June, the highest in three years. Although many analysts expect inflation to slow over the remainder of the year, the accumulation of reserves lays the groundwork for a continuation of fast money growth and so will limit the scope for any easing of price pressures.

“The current intervention of the People’s Bank of China has been piling up more and more foreign exchange reserves. This is not sustainable,” said Li-Gang Liu, head of China economics at ANZ Bank.

The People's Bank of China (PBOC), the central bank, announced on Wednesday that it will raise bank's benchmark one-year borrowing and lending rates by 25 basis points beginning Thursday.

This is the third time for the central bank to raise interest rates this year.

Meanwhile, the central bank has hiked the reserve requirement ratio for banks six times this year.

Inflation data for June will be released on July 15 and many economists forecast it will hit a new high above 6 percent.

The CPI rose by 5.5 percent in May from the previous year, setting a 34-month high and well above the government's yearly inflation ceiling of 4 percent.

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The Hang Seng Index fell 1.2 percent to 21,695.26 on June 17. The Hang Seng China Enterprises Index, which tracks so- called H shares of Chinese companies, declined 1 percent to 12,045.05.

Chinese developers: China's new home prices rose in May from a year earlier in 67 of the 70 cities monitored by the government, the statistics bureau said on its website on June 18.

China Resources Land Ltd. (1109 HK), a state-controlled developer, declined 0.5 percent to HK$12.54. China Overseas Land & Investment Ltd. (688 HK), controlled by the nation's construction ministry, gained 0.8 percent to HK$15.

China is likely to raise interest rates within the next 10 days as price pressures encourage the government to end the longest pause since increases began in October, Nomura Holdings Inc. says.

The world’s second-biggest economy is maintaining momentum and “inflation is still high,” Nomura economist Sun Chi said in a phone interview from Hong Kong today. Sun reaffirmed a forecast for an increase by the end of June.

China’s benchmark stock index slid to the lowest in almost nine months today on concern that monetary tightening to tame inflation will erode company profits and trigger an economic slowdown. Policy makers may be assessing the threats to export demand from weakness in the U.S. economy and a possible Greek default on debt.