China has overtaken Japan to become the world’s biggest holder of foreign exchange reserves. The China Business News reported that China’s forex reserves increased by US$8.5 billion in February to US$853.7 billion. Japan had reserves of US$850.1 billion at the end February 2006. China’s reserves have increased significantly in recent years due to the growing trade surplus, foreign direct investment inflow and speculative capital.
The average increase in reserves of US$17.4 billion during Jan.–Feb. is almost near to the average increase of US$6.6 billion per month the last quarter of 2005. The reserves would have been much larger, had China not used US$60 billion to re-capitalize three big banks, and sold US$6 billion from its reserves in November 2005 under a one-year swap deal with local banks.