They also said that the continued rise, fueled by strong exports and further inflows of foreign direct investment, is likely to convince Beijing to use some reserves to buy badly needed energy and other resources, despite official statements to the contrary.

China’s reserve holdings jumped to a record 8.9 billion by the end of 2005, up 34.3 percent from 9.9 billion the previous year, according to central bank data released over the weekend.

"On current trends, they will top Japan this year," said Bert Hoffman, lead economist with the World Bank’s Beijing office.

"The build up in Japan is less rapid."

Japan’s holdings have risen in only five of the last 13 months to reach 6.9 billion at the end of December.

Robert Rennie, chief currency analyst with Westpac in Sydney, said China’s reserves are higher than the latest data show, given the billions of dollars siphoned off as loans to recapitalize the nation’s banking sector.

On a net basis, China’s holdings already exceed those of Japan, he said.

"If you take account of reserves lent to Chinese banks, that happened many, many months ago."

China’s exports expanded by over 28 percent last year, leaving a trade surplus of nearly 2 billion. Foreign direct investment was down a modest 0.5 percent but was still at a strong billion.

The World Bank’s Hoffman said he expects China’s foreign exchange reserves to expand at a slower rate than in 2005 this year, making it unlikely that the politically important trillion level will be breached before the yearend.

But others disagree.

ING economist Tim Condon said that Beijing should see its reserves rise to trillion before the end of the year, matching the annual gains of over 0 billion recorded in 2004 and 2005.

"If the US dollar remains firm, then flows looking for an appreciation of the (Chinese) yuan will remain at their 2005 levels or lower and we’re forecasting a more or less unchanged trade surplus," Condon said.

"If the dollar weakens a lot, then you’re going to get a lot more inflows of hot money, and foreign exchanges reserves could be considerably above the 2005 levels."

The big rise in foreign exchange reserves is contributing to already substantial trade friction and adding to pressure for China to let its currency appreciate.

The US and other trading partners have watched with alarm as their trade deficits with China widen. They have also been watching as Beijing’s pile of foreign exchange grows bigger.

China’s foreign trade partners contend the yuan is substantially undervalued and have been pushing Beijing to let the currency rise. China revalued the yuan against the dollar by 2.1 percent in July last year and it has been moving to make its currency regime more flexible.

China saw the US and Europe impose quotas on its textile exports last year while shoes and a host of other products have been targeted for trade actions. Beijing faces the threat of broader-ranging tariffs this year if it fails to move more rapidly on letting the yuan appreciate.

"It’s a political issue," Condon said.

"Every time there’s a trade release or reserve numbers come out like this it tends to grab headlines."

The trade friction could spur efforts by Beijing to use the reserves for purchases of energy and other commodities, analysts said.

They note that the central bank has said there are no such plans at the moment but economists have frequently advised the government to move ahead on this issue.

China has already been keen to add to its oil and natural gas reserves to ensure that it has sufficient energy for its fast-growing economy.

Of the commodities China could seek to buy, "the obvious one is oil," Condon said, pointing to a bid last year by Chinese offshore oil company CNOOC to take over US oil major Unocal as an example of Beijing’s outbound foreign investment push.

Condon said that the US and Chinese economies are probably too interdependent for current protectionist sentiment to gain the momentum needed to seriously damage bilateral trade.

But he also said that China will increasingly rival the US in its acquisitions of energy and other resources abroad, funded in part by burgeoning foreign exchange reserves.

"They’re going to be competing not only in the trade arena but also the investment fields," he said.