Chinesepod - Hot money inflows to be curbed

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BIZCHINA / Center

Hot money inflows to be curbed

By Xin Zhiming (China Daily)
Updated: 2007-06-27 08:20

The foreign exchange regulator yesterday vowed to strengthen controls
over illegal capital that has been flowing into the stock and property
markets.

"Speculative capital has flown into the country under the guise of trade
and investment," Deng Xianhong, deputy head of the State Administration
of Foreign Exchange (SAFE), said in a statement.

"The capital inflows have, to some extent, affected the domestic
macro-economic situation and healthy economic development," he said.

With the domestic market flush with excess liquidity, the authorities
have been trying to block the inflow of speculative capital seeking to
benefit from a rising yuan.

Some of the hot money is from short-term foreign borrowings, which is why
the regulator has been keeping a close watch on short-term foreign debt,
said Zhao Xijun, finance professor at Renmin University of China.

By the end of last year, the SAFE said, China's short-term foreign
borrowings increased by 16 percentyear on year.

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About 57 percent of the foreign debt was short-term by the end of 2006,
compared to 55.8 percent by the end of last June.

Hu Xiaolian, director of the SAFE, said the watchdog will launch a
nationwide check on banks' control of short-term foreign debt.

Hu, who is also the vice-governor of central bank, said the priorities
for the SAFE are to supervise speculative capital inflows, strengthen
monitoring and management of cross-border flows, especially short-term
capital flows, and control foreign capital inflows with fictitious trade
background and bloated exports.

Economists are not in agreement on the exact amount of hot money in
China, but some put the figure at $300 billion.

They have mostly entered the economy in the form of bank borrowings, from
underground banks, bloated exports or understated imports, said Zhao.

"The checks by the foreign exchange regulator will help it figure out how
the money came in before it takes countermeasures," he told China Daily.

The highly volatile speculative funds pose a big risk, said Zhuang Jian,
senior economist with the Asian Development Bank.

"It will fan speculative sentiment but once it flows out abruptly, it
will deal a blow to the financial system."

Since last year, the SAFE has strengthened checks on illegal capital
inflows and foreign exchange settlements in goods and service trade and
such sectors as real estate and tourism.

It penalized 19 Chinese and 10 foreign banks for violating rules but did
not reveal details.

(For more biz stories, please visit Industry Updates)

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