Published: Tuesday, 14 Jul 2009 | 10:14 PM ET

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Annual growth in China's broad M2 measure of money supply surged in June on the back of breakneck bank lending ordered by Beijing to pump up the world's third-largest economy.

And in a sign that money is flowing back into China in anticipation that those stimulus efforts will succeed, the central bank's foreign exchange reserves leapt by $177.9 billion in the second quarter to $2.13 trillion.

China is the only country to have amassed more than $2 trillion in official currency reserves.

"Capital inflows are strong because of China's economic recovery and a red-hot property market," said He Weijiang, an analyst with Central China Securities in Shanghai.

In a statement on its website, the People's Bank of China said reserves rose $55.14 billion in April, $80.6 billion in May -- a record for a single month -- and $42.1 billion in June.

The cumulative total far exceeded combined proceeds of China's trade surplus and foreign direct investment inflows in the second quarter.

Changes in reserves are clouded by a host of undisclosed transactions and swings in the valuation of the non-dollar part of the stockpile, but the surge points to inflows of foreign capital betting on a strengthening economy and, perhaps, a stronger yuan.

That was in stark contrast to the first quarter, when reserves rose just $7.7 billion.

China recorded substantial financial outflows in the January-March period -- estimated by the World bank at $109 billion -- as the global credit crisis caused banks to call in loans and multinational firms to repatriate profits.

He with China Central Securities said he expected China to fine-tune mortgage and other policies to cool the property sector, but he ruled out a rise in the yuan's exchange rate in the foreseeable future as exporters were under severe pressure.
     
Lending Frenzy

The PBOC said growth in the broad M2 measure of money supply rose to 28.5 percent in the year to June, blowing past forecasts of a 26 percent rise and accelerating from a 25.7 percent increase in the 12 months to May.

Money is being created at a faster clip because banks, which are nearly all state-owned in China, are lending at a frantic pace in response to the ruling Communist party's drive to secure at least 8 percent economic growth this year.

Yuan loans outstanding were 34.4 percent higher than a year earlier, up from May's year-on-year reading of 30.6 percent.

"Probably the smaller lenders are expecting a credit tightening in coming months, so they rushed to lend out money in June. Everybody -- the regulators and the banks -- knows that the lending spree can't go on like this. There'll be a slowdown," He, the China Central Securities analyst, said.

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The PBOC had already published preliminary figures on July 8 showing that banks extended 1.53 trillion yuan in new local-currency loans in June, up from 664.5 billion yuan in May. It confirmed that total on Wednesday.

Annual growth in M1 money supply, measuring checking accounts and cash in circulation, leapt to 24.8 percent in June from 18.7 percent in May.

Growth in the narrower aggregate, an indicator that firms and consumers are keeping funds liquid in order to invest or spend, has been rising sharply since February.

Yuan lending in the first six months totaled 7.37 trillion yuan, far exceeding what the government had said was its minimum target of 5 trillion yuan for all of 2009.

New yuan lending in 2008 was 4.91 trillion yuan, up 35.3 percent from 3.63 trillion yuan in 2007.

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