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Written by: Staff
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BEIJING, Apr 14 (Reuters) Annual growth in China's broad M2 money supply held steady in March, remaining well above target despite efforts by the central bank sought to rein in liquidity, while loan growth accelerated briskly.

The central bank, which has an M2 growth target for 2006 of 16 percent, does not want money to be so cheap and plentiful that firms ramp up wasteful investment. But nor does it want to push up money market rates to levels that would make it worthwhile for speculators to lay bets on a quicker appreciation of the yuan.

China's foreign exchange reserves, the world's largest, rose $56.2 billion in the first quarter to a record $875.1 billion.

KEY POINTS: -- Economists had expected a rise in M2 of 18.5 percent.

-- At a seasonally adjusted annualised pace, M2 up 17.5 percent from February.

-- Annual growth in yuan loans accelerated in March to 14.7 from 14.1 percent in February.

-- Money supply (percent change on a year earlier): Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May M2 18.8 18.8 19.2 17.6 18.3 18.0 17.9 17.3 16.3 15.7 14.6 M1 12.7 12.4 10.6 11.8 12.7 12.1 11.6 11.5 11.0 11.3 10.4 M0 10.5 8.0 22.1 11.9 10.9 9.0 8.5 9.4 9.1 9.6 9.3 COMMENTARY: SONG GUOQING, CHIEF ECONOMIST AT CHINA STOCK EXCHANGE EXECUTIVE COUNCIL, A BEIJING-BASED THINK-TANK: ''The pace of the build-up in foreign exchange reserves in the first quarter was in line with our expections. I think the reserves will continue to rise at a similar speed for the remainder of this year.

''The reserves will hit $1 trillion within this year.

''I believe what China should do is let the yuan appreciate at a faster clip, but apparently the government has other concerns.

''Looking at the figures, credit growth accelerated in the first quarter, but money supply growth was not as strong as I had expected.'' LINKS: For details, see the People's Bank of China Web site at http://www.pbc.gov.cn. Latest releases may not be immediately available.

MARKET REACTION: -- The yuan was trading at 8.0165 per dollar at 0613 GMT, unchanged from before the release of the data.

BACKGROUND: -- The central bank has set a target for M2 growth in 2006 of 16 percent. The bank says it is pursuing a stable monetary policy.

-- The central bank raised its target in 2005 to 17 percent from 15 percent after deliberately injecting extra liquidity into the banking system around mid-year to cushion the economic impact of July's yuan revaluation.

-- The central bank has since switched gears and is now soaking up more of the excess cash in the banking system in order to put the brakes on money growth.

-- Many economists say that, after average annual M2 growth of 19 percent in the first two months of 2006, it is now necessary for the central bank to employ tightening measures beyond its regular open market operations.

-- Possible measures include allowing further yuan flexibility, raising money market interest rates and raising banks' reserve requirements, analysts say.

REUTERS PV ND1202

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