Hot Money, Hot Potato

Asia Monitor reports in its October, 2008 issue on China’s continuing problem with “hot money”.

China’s foreign exchange reserves rose to US $1.809 trn in June, but a Ministry of Commerce source has revealed that around US $107.2 bn of the US $185.2 bn of FX inflows on the current account in the first five months of 2008 could not be explained.

The inflows of hot money are perceived to be hampering China’s attempt to curtail the ever increasing inflationary pressures.

Indeed, China’s policy of keeping its exchange rate undervalued for the sake of supporting its export sector, has ensured that concerns over hot money continue to rage as speculators bet on further significant yuan appreciation.

Meanwhile, massive inflows of foreign direct investment also continue to keep China’s capital and financial accounts in healthy surplus. China attracted US $60.7 bn in FDI in the first seven months of 2008, a 44.5% increase over the same period in 2007.

An announcement on the State Administration of Foreign Exchange’s website, the country’s foreign exchange regulator, said exporters will be required to park revenues in special accounts while the authorities verify if the funds are the results of genuine trade.

In an attempt to curb speculative inflows of capital, China issued new controls on transfers of currencies across its borders on August 6, with immediate effect. The new regulations call for penalties of up to 30% of the capital involved in any unauthorized inward or outward currency transfers which give authorities stronger control over such transactions and expand reporting requirements for financial institutions.

There has been a growing discussion among private sector economists about whether the authorities should introduce a large, one-off appreciation of the currency in order to limit speculation. However, most economists believe that the government would be very reluctant to take such a step as parts of the export sector are already suffering badly because of higher costs, including the stronger renminbi.

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