Rising Forex Reserves Spark Concerns over Hot Money Influx

10/14/2010 Source: Xinhua

The People’s Bank of China reported on Oct. 13 the country’s fastest quarterly growth of foreign exchange reserves since the beginning of year, sparking concerns over the possible impact on China’s economy brought by hot money rushing in.

In the third quarter of 2010, China’s foreign exchange reserves rose by 194 billion U.S. dollars, witnessing a much higher growth rate than in the previous two quarters.

Hot money, referring to the short-term flow of money into a country to take advantage of favorable interest rates, is thought to be responsible for the rapid growth in foreign exchange reserves.

“Under the shadow of a global currency war, yuan assets can provide the greatest safety and is the most attractive to international investors,” said Guo Tianyong, head of the China Banking Research Center at the Central University of Finance and Economics.

The value of yuan hit a new high against U.S. dollar Wednesday as the central parity rate of the yuan was set at 6.6693 per U.S. dollar on Oct. 13, according to the data released by the China Foreign Exchange Trading System.

Data from China’s customs showed that the country’s trade surplus in the third quarter was only 65.3 billion U.S. dollars.

Zhao Qingming, a researcher with China Construction Bank, said that the appreciation of the euro against the U.S. dollar was another reason for rapid growth of foreign exchange reserves.

In September, funds outstanding for foreign exchange stood at 289.6 billion yuan, which is around 43.5 billion U.S. dollars, maintaining its upward trend.

“It indicates the accelerating influx of hot money in the context of expectations of a stronger yuan and higher asset prices,” explained Zhuang Jian, a senior economist with the Asian Development Bank.

“The recent rise in bulk commodity prices and housing prices are both signs of the hot money influx,” Zhuang said.

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