China's $3 trillion in reserves more a bane than a boon

"It's clearly too much, it's clearly excess to needs, and more importantly, it's damaging to the economy," said Stephen Green, an economist at Standard Chartered.

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In the last decade, China's gaping trade surpluses and its incessant buying of dollars to suppress the yuan's value have led the reserves to balloon 17-fold.

For every dollar that goes into reserves, China prints about 6.5 yuan, adding even more cash to its economy. This is worrying since China is already at pains to drain excess money, with inflation running near its fastest in three years.

"Every new dollar of foreign exchange reserves is every new dollar of base money. And that drives up inflation," Green said.

"TOO HIGH A COST"

To neutralize all the money that has been created, China has conducted what are known as "sterilization operations." Its primary weapon has been to increase banks' reserve requirements, forcing them to lock up cash that they would otherwise lend.

Required reserves are already at a record 20 percent of deposits for China's biggest banks, denting their profitability, and analysts believe that the room for further increases is limited.

By most estimates, China only needs about $780 billion of reserves. That would be sufficient to pay for three months of imports and to cover all of China's short-term foreign debt -- the standard metrics of how much countries should hold in reserves as a form of insurance in case of a financial crisis.

Yet the stockpile has grown so big because China refuses to let the yuan rise faster for fear of hurting its exports, much to the frustration of its trading partners, especially the United States.

But it is also a problem domestically. It runs directly counter to China's need to boost consumption to cope with tepid growth in its major export markets, said Li Jie, a researcher at the Central University of Finance and Economics.

"It is too high a cost to pay to let the whole domestic economy suffer from high inflation just to protect exporters," he said. "China cannot afford to sacrifice its internal economy as it has a vast domestic market."