China's Foreign Currency Reserves US$1.8 Trillion

China's foreign currency reserves reached US$1.8 trillion at the end of May 2008. In May the increase was US$40.3 billion but this was slow compared to an increase of US$75 billion in April. In China, the government exchanges RMB for foreign currencies earned by Chinese companies and citizens. This creates enormous inflationary pressures as RMB are created to soak up the foreign currencies.

The People's Bank of China, the central bank, then issues bonds to soak up the excess RMB. This means that banks are flushed with cash and so the government has to raise the banks reserve ratios to try and limit lending growth.

The central bank also suspects that there is "illegal" inflow of foreign currency betting on an increase in the RMB exchange rate. This "illegal" inflow consists of over billing foreign companies, or foreign companies under billing and leaving RMB balances behind.