China's foreign exchange reserve reached 1.2 trillion U.S. dollars by the end of March, up 37.36 percent from the same period last year, the People's Bank of China announced on Thursday.

"I'm not surprised at the figure," Cai Zhizhou, an economist with Beijing University, said and added that forex sharp rise has become "normal".

China's forex reserve came to 609.9 billion U.S. dollars by 2004, 818.9 billion U.S. dollars by 2005 and 853.6 billion U.S. dollars by the end of last February, making the country overtake Japan to become the biggest foreign reserve holder of the world.

"The rising trade surplus is the major factor contributing to the forex reserve boom," Cai said and pointed out that low prices of Chinese goods contributed to the rising trade surplus.

"China needs forex reserve to avoid financial risks as the country's dependence on foreign trade is going up," said Cai.

China's foreign trade has risen by more than 20 percent annually since 2002 while the ratio of foreign trade to GDP has risen from 30 percent to nearly 70 percent during the same period.

The country's trade surplus reached 46.44 billion U.S. dollars in the first quarter, nearly double the 23.3 billion U.S. dollars surplus in the same period last year.

However, the rising trade surplus has brought increasing trade frictions between China and its trade partners.

To balance, the country has lowered and is considering to further lower export rebates on certain goods, ranging from steel to textile.

The trade surplus in March went down to 6.87 billion U.S. dollars, cracking the 10 billion mark for the first time since March 2006 and showing a downward trend.

"A large-scale forex reserve may backfire," said Cai. "It is the major reason leading to the excess liquidity in China."

The central bank has to spend quantities of basic money to purchase foreign exchange, thus aggravating the problem of surplus fluidity

On the other hand, continuous growth of forex reserve has in fact increased the pressure on appreciation of the Chinese currency, which in turn has exerted greater pressure on value preservation of China's forex reserve.

It is estimated that by 2010, China's forex reserve will reach 2.9 trillion U.S. dollars. China thus plans to launch a state forex investment company.

The investment company will issue 200 billion to 250 billion

U.S. dollars of RMB-denominated bonds. Money to be raised will be firstly used as strategic investment for energy enterprises like CNOOC, earlier reports said.

Source: Xinhua