Chinese money supply, forex reserves surge

China's authorities have been talking about tightening policy. They probably need to step up the pace. From Bloomberg:

China's money supply grew by more than the central bank's target for a second month and foreign- exchange reserves surged to a record $1.2 trillion, increasing pressure on the government to allow faster yuan gains.

M2, which includes cash and all deposits, increased 17.3 percent in March from a year earlier, the central bank said today. The currency reserves, the world's largest, grew 37 percent from a year earlier, the fastest pace since November 2005.

Booming exports helped drive a $136 billion increase in the reserves in the first quarter...

Faster yuan appreciation is "an essential tool to tighten overall monetary conditions," JPMorgan Chase & Co. economist Wang Qian said in Hong Kong.

The increase in reserves led Macro Man to ask: "What the hell is China playing at?".

What makes the reserve growth particularly galling is that the authorities have dramatically slowed the pace of RMB appreciation since mid February. Now, maybe this has been in preparation for a large one-off step revaluation of the RMB....but probably not.

Even without a revaluation, China is no longer exporting deflation to the same extent that it once did, not to the US anyway. Again from Bloomberg:

Prices of U.S. imports rose last month by the most in almost a year, led by gains in crude oil and natural gas that are likely to keep the Federal Reserve from cutting interest rates.

The 1.7 percent increase was more than twice economists' forecasts and followed a 0.1 percent gain in February, the Labor Department said in Washington today. Prices excluding petroleum rose 0.3 percent. Separate numbers from the department showed jobless claims climbed last week...

Today's report showed prices for imported consumer goods excluding autos rose 0.2 percent after no change in the prior month. They increased 1.8 percent from the same month last year, the biggest year-over-year rise since January 1996. Prices of imported automobiles, parts and engines rose 0.1 percent after rising 0.2 percent...

Prices of goods from China rose 0.2 percent in March. Prices of U.S. exports rose 0.7 percent in March after rising 0.7 percent. Prices of farm exports increased 2.1 percent, while those of non-farm exports rose 0.6 percent.

Mike Larson makes a similar observation at Interest Rate Roundup.