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China's foreign exchange reserve reached 1.2 trillion U.S. dollars by the end of March, up 37.36 percent from the same period last year, the People's Bank of China announced on Thursday.
"The rising trade surplus is the major factor contributing to the forex reserve boom," said Cai Zhizhou, an economist with Beijing University.
Low prices of Chinese goods contributed to the rising trade surplus, he said.
"China needs forex reserve to avoid financial risks as the country's dependence on foreign trade is going up," said Cai.
China's foreign trade has risen by more than 20 percent annually since 2002 while the ratio of foreign trade to GDP has risen from 30 percent to nearly 70 percent during the same period.
"But a large-scale forex reserve may backfire," said Cai. "It is the major reason leading to the excess liquidity in China."
According to a circular released by the central bank, the foreign exchange reserve increased by 135.7 billion U.S. dollars in the first quarter, 79.5 billion U.S. dollars more than the rise in the same period of last year.
The reserve increased by 44.7 billion U.S. dollars in March, 23.3 billion U.S. dollars more than the rise in March 2006.
China's trade surplus reached 46.44 billion U.S. dollars in the first quarter, nearly double the 23.3 billion U.S. dollars surplus in the same period last year.
However, the trade surplus in March went down to 6.87 billion U.S. dollars, cracking the 10 billion mark for the first time since March 2006 and showing a downward trend.
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