Updated: 2006-03-28 09:41
China has overtaken Japan to become the world's biggest holder of foreign exchange reserves after its stockpile grew $8.5 billion in February to $853.7 billion, the China Business News reported on Tuesday.

Japan had reserves at the end of February of $850.1 billion.

Growth in China's reserves last month slowed from $26.3 billion in January, the Shanghai newspaper said.

"The massive foreign exchange reserves have brought about many benefits, but they also reflect continued imbalances in the economy," the newspaper said.

China's reserves have ballooned in recent years as the central bank, in order to hold down the yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital.

The average increase in reserves of $17.4 billion in January and February is close to the average rise of $16.6 billion a month in the last quarter of 2005.

The reserves total would have been even bigger if Beijing had not used $60 billion to recapitalise three big banks.

The central bank also sold $6 billion from its reserves in November under a one-year swap deal with local banks.