China's stock of foreign exchange reserves, already the world's largest, surged in the first quarter of this year to $1,202bn (£608bn, �95bn), adding in three months more than half the total increase of 2006.



The People's Bank of China, the central bank, offered no explanation for the rise in reserves of $135.7bn for the January quarter, compared with the increase of $247.3bn for the whole of last year.



Just under half of the increase in reserves can be explained by two factors: the trade surplus for the first quarter, which was $46.4bn, and foreign direct investment (FDI) of about $15bn.











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However, on top of the trade surplus and investment, another $25bn of funds have flowed into China every month so far this year.



The most common explanation offered for the surge in funds is the unwinding of currency swaps that the PBoC is said to have arranged last year with Chinese commercial banks to keep funds offshore.



Qing Wang of the Bank of America in Hong Kong said a recent easing of macroeconomic controls used by the authorities in the second half of last year to damp the economy could also explain the rise.



The macro controls, which were focused on cutting lending, could have given banks an incentive to place funds offshore in foreign bonds, earning more money than if they had been left at home.



In turn, the recent easing means the banks may have brought the money back onshore to make it available for lending.



“While both [the unwinding of the swaps and the banks bringing money home] are recorded as capital inflows in external balance of payments, we do not believe they are capital inflows from genuine foreign sources,” said Mr Wang.



“We instead believe they reflect repatriation of foreign funds owned by Chinese financial institutions.”



Another possible factor is the slow but gradual strengthening of China's currency, the renminbi, which may be attracting “hot money” to China.

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