Chinese reserves data released today seem to be one more sign that the Chinese stimulus might be working a bit too well. China’s reserves stood at $2.13 trillion up from $1.95 trillion at the end of March 2009.  Although reserve accumulation was likely lower than the headline $178 billion, it implies that hot money is back in China.  Adjusting for valuation, Chinese reserve growth was likely about $140 billion, much higher than the $60-70 billion of China’s trade surplus, FDI and interest income in this period.   This accumulation also suggests that China continues to have a hard time diversifying its holdings away from the U.S. dollar.

Adjusting for valuation  -- the changes in value of the non-dollar holdings in China’s reserves -- would imply reserve growth of around $135-140 billion. This accumulation rivals that of Q2 and Q3 2008 for the highest quarterly level.

It is one indicator that suggests that parts of China’s economy may be overheating as China tries all measures to stoke growth.  It seems well in line with almost 40% y/y urban fixed investment in May 2009, and loan growth equivalent to 25% of 2008 GDP. However, it just underscores some of the difficulties in both stoking growth and avoiding future distortions.