China's broad measurement of money supply, or M2, rose 16.9 percent year on year in 2006, a growth "basically" in line with the economic development, the central bank said yesterday.

It was 0.1 percentage point higher than the year-on-year figure by the end of November.

M1, the narrow measurement of money supply, rose 17.5 percent year on year, the People's Bank of China (PBOC) said on its website.

M1 includes cash and institutional demand deposits, which reflect fluidity of capital in public and enterprises' hands. M2, which includes M1 and other types of deposits, reflects the overall situation of money supply.

Despite the slight rise, "the growth rate is normal and acceptable," said Li Yongsen, professor with the China Youth University for Political Sciences.

The PBOC is worried that excessive liquidity has been stoking the country's investment boom and has raised commercial banks' reserve requirements four times and interest rates twice since April 2006.

The stable money supply during the past months show that the macroeconomic regulation measures are paying off, analysts said.

China foreign exchange reserve, however, reached $1.07 trillion by the end of December, up 30.2 percent over the previous year, the PBOC said. "This will exert heavy pressure on policy makers this year," Li said.

Though the money supply's growth rate was not very high because of its big scale, close attention should be paid to its structure, he said.

There are signs to indicate that more money has flown into investment rather than consumption, a scenario that can create problems for the national economy, Li said.

The PBOC said yuan-denominated lending rose 15.1 percent over the previous year, up by 2.1 percentage points compared with the figure at the end of 2005.

Banks extended 3.18 trillion yuan ($407.7 billion) in new loans in 2006, when the PBOC's original target was 2.5 trillion yuan ($320.51 billion).

Analysts said the lending growth momentum showed there was still a possibility for investment to rebound this year and create new challenges for macroeconomic regulators.

Li, however, said he didn't see the need to raise interest rate anytime soon. His view was shared by other economists, though they said the policy makers could raise the rate by a small margin this year.

Source: China Daily