China's forex reserves set to touch $1 trillion

China's foreign exchange reserves look set to create a new record at $1 trillion at the end of this month or early November, posing new problems how to best manage it, economists said.

The reserves, already the world's biggest, surged to $987.9 billion at the end of September, largely driven by a burgeoning foreign trade surplus and massive inflow of foreign direct investment.

In the first nine months of the year FDI stood at $42.59 billion, although this was a 1.52 per cent drop year-on-year.

Reserves grew on average $18.8 billion each month from January to September, statistics from the People's Bank of China (PBOC), the central bank, show.

"How to manage such a huge reserve is a big challenge," a research fellow at the Institute of Finance Research under the Chinese Academy of Social Science, Yi Xianrong was quoted as saying by China Daily.

"The crux of the problem is that you have to keep the value stable or increasing," Yi said.

The ballooning foreign reserves, many economist say, is a major reason behind the loose money supply. This is because the central bank has to issue additional money to mop up the excess US dollars in the market, resulting in excessive liquidity in the banking system.

And the fluctuating foreign exchange rate also poses a huge risk, economists say.

In a bid to minimise such risks, the PBOC should diversify its existing US dollar-dominated foreign reserves structure, and increase its holdings of euros or other major international currencies, said Li Yongsen, a finance professor at Renmin University of China.