By Xin Zhiming (China Daily)
Updated: 2007-07-27 17:06

China's trade surplus jumped 83 percent to $112.5 billion from January to June as its foreign exchange reserves mounted to $1.3 trillion.

Such figures have aroused concerns not only from its trade partners, but those who are not sure whether policymakers can handle the increasing liquidity.

Almost all agree that excess liquidity is flooding the Chinese market, but there is no consensus how the conclusion has been drawn.

"It's very hard to estimate the excess liquidity," said Stephen Green, senior economist with Standard Chartered Bank. "The measure I like the best is M2/GDP ratio, which hit 160 percent (in China) three years ago," he told China Daily.

M2 is the broad measure of money supply, which includes all types of deposits and cash. It exceeded 3.7 trillion yuan by the end of June, according to the central bank.

By the end of last year, China's M2/GDP ratio rose to 165 percent, much higher than Japan's 143 percent and 53 percent in the United States.

Related readings:  Central bank raises interest rates, cuts interest income tax  Survey: Rising food prices upset consumers  Report: Liquidity high but manageable  Special bond issue won't seriously impact liquidity Securitization to help China reduce excessive liquidity

Economists also use other indicators to assess the situation, such as the gap between bank deposits and lending and the ratio of liquid assets to overall banking assets, which all point to excess liquidity in China.

The excess liquidity has come, fundamentally, from two sources: domestically, from accumulation of deposits; internationally, from inflow of capital such as the foreign exchange reserves and speculative money, according to Li Yang, director of the Institute of Finance and Banking, the Chinese Academy of Social Sciences (CASS).

China's imbalance in its investment and consumption structure has led to prolonged weak demand, which has exacerbated the pile-up of deposits, said Zhuang Jian, senior economist with the Asian Development Bank (ADB) in China.

The country's economy has been dependent on investment and exports in the past decade, not domestic demand, although the government is trying hard to increase consumption.

By the end of April, bank deposits held by the Chinese people amounted to 17.37 trillion yuan, nearly double the level five years ago.

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