China’s currency reserves are said to be exploding — with the Asian giant adding another $131 billion to its reserves in just the past three months alone.

These latest additions to its foreign-reserve holdings bring the country’s total to a staggering $1.33 trillion as of June 30.

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This news, coupled with the revised 2006 economic growth data showing a 12-year high in growth of a remarkable 11.1 percent, has led some economists to predict that China will soon surpass Germany as the world’s third largest economy.

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The U.S. and Japan are the first and second-largest national economies, respectively.

The recent surge in foreign reserves indicates, according to the Wall Street Journal, that "enormous sums of money [are] flowing into China.” The paper notes the vast amount of money pouring into China makes it difficult to actually trace the money.

China’s reserves are building up quickly because "because China exports far more than it imports and it invests abroad on a much smaller scale than foreigners invest in China, more foreign currently enters the country than flows out of it. That allows China to build up its reserves.”

During the past three years, China added about $15 billion to $20 billion a month to its foreign reserves. That rate has more than doubled in recent months.

Apparently, some money coming into China is through informal channels to leverage China’s booming economy, strengthening currency and local stock market.

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This fact and China’s booming economy suggests it may be overheating and could pop.

Already, many China’s public stocks sell for huge multiples – sometimes 100 times earnings or more. China’s economic success may be due more to cash inflows into the country – rather than underlying profitable businesses feeding the local economy.

If this economic tap were to slow down, the Chinese economy could go into a tailspin, creating a domino effect throughout Asia and capital markets around the world.

Still, with such huge cash reserves China becomes an influential global currency player and can easily influence the U.S. dollar.

Recent reports suggest China’s central bank has been seeking to move out of dollars into the euro, gold and other currencies.

Editor's note:
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