UPDATE 1-China May FX reserves hit $1.797 trillion -source

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BEIJING, June 25 (Reuters) - China's foreign exchange reserves rose $40.3 billion in May to $1.79696 trillion, a source familiar with the data told Reuters on Wednesday.

That marked a slowdown from a record $74.46 billion rise in April, based on data disclosed to Reuters last month.

But it was still significantly greater than the nearly $28 billion that flowed into China in May from the trade surplus and foreign direct investment -- a strong indication for many economists that speculative capital is still pouring into the country.

The source declined to be identified because he was not allowed to speak officially to the media.

China's official foreign exchange reserves have now risen $268.8 billion in the first five months of the year, compared with $461.9 billion in all of 2007.

May's slowdown in accumulation occurred even though the yuan's CNY=CFXS pace of appreciation picked up last month from in April.

In theory, that should have given hot-money investors greater reason to speculate on the currency. Authorities have voiced fears about the risks from outside investors betting on the yuan's continued appreciation.

Economic policy makers at the highest reaches of the Chinese government have met periodically to examine the issue of hot money inflows, which complicate the People's Bank of China's (PBOC) task of managing the money supply.

The PBOC has to buy most of the dollars that flow into China in order to hold down the yuan's exchange rate. The central bank then has to sterilise the impact on the money supply by mopping up the domestic currency it creates in the process.

Reserves in May grew by more than the combined inflows from China's trade surplus and FDI for the fifth month in a row.

But Beijing will take heart that unexplained capital inflows, an indicator of hot money, dropped sharply to $12.3 billion in May from $50.2 billion in April.

Hong Kong has been a major source of the money entering China, with yuan deposits by residents of the southern Chinese territory surging earlier this year.

But the Bank of China, the yuan's clearing house in Hong Kong, widened the spread on yuan/Hong Kong dollar conversions in May, which officials said had slowed the tide of cash.

On Tuesday, China's top foreign exchange regulator said it would step up efforts to monitor capital inflows and fend off attacks by global speculators.

The PBOC publishes the reserves data every quarter. The next figures, for the end of June, are due in mid-July.

Foreign exchange reserves (in billions of dollars, period ending):

May08 Apr08 Mar08 Dec07 Sep07 Jun07 Mar07

1,797.0 1,756.7 1,682.2 1,528.2 1,433.6 1,332.6 1,202.0 (Reporting by Beijing Newsroom; Editing by Anne Marie Roantree)