China battles ‘hot money’

July 6th, 2008 - 9:05 am ICT by IANS  

Beijing, July 6 (Xinhua) China has taken a series of increasingly aggressive measures in the past several months to offset the impact of so-called “hot money,” amid runaway growth of its foreign exchange reserves. The growth of the reserves has been so massive that it has raised alarms over the country’s financial security.

According to the State Administration of Foreign Exchange (SAFE), as of the end of May, foreign exchange reserves stood at $1.797 trillion.

During the first five months of 2008, the reserves increased by 18.7 percent year-on-year, or $268.7 billion, SAFE figures showed.

Where is all that money coming from and where is it going?

What caught the attention of analysts was that foreign exchange reserves jumped at the same time as the current account surplus and foreign direct investment (FDI) into the fixed asset field declined year-on-year.

Jiang Zheng, a macro-economist at a Beijing-based securities firm, has closely tracked these figures and analyzed the data.

Deducting the trade surplus and the FDI, there was an unexplained $147.9 billion in the reserve, which Jiang and other analysts consider to be “hot money” - short-term global speculative funds moving into financial markets in search of the highest short-term return.

The government does not release official figures on this category of funds. In fact, it does not even use the term “hot money”. So analysts can only make estimates.

Jiang said the “hot money” figures deduced by analysts might even be underestimates. “There is a tricky decline in the FDI figures, i.e. the drop of fixed-asset investment,” he explained.

“Foreign direct investment in the first five months soared about 55 percent. But strangely, fixed-asset FDI in the first five months fell 3.5 percent from last year’s figure,” Jiang said.

Jiang said it appeared that some speculative money had managed to move into China in the guise of FDI.

But there are many other channels for “hot money” to flow into China. These include international trade with over-invoiced exports and underground private banks, according to Jiang.

Jiang and other analysts maintained that as much as $600 billion in “hot money” had surged into the country, most of it after 2005.

Jiang said he was surprised at the volume of “hot money” inflows in the first five months of this year. The monthly inflow of “hot money” from January-May was estimated at $35 billion, more than double the $15 billion figure for the same period last year, Jiang said.

In April alone, deduction showed that a record $50.2 billion of “hot money” poured into China, he said.

Many will ask why such huge sums of “hot money” have been continuing to flood into China and where it is going.

Since the start of the global financial crisis, which surfaced last summer with problems in the US subprime mortgage market, the Federal Reserve has since September cut interest rates seven times to stimulate economic growth. The Fed funds target rate has fallen from 5.25 percent to the current 2 percent.

In contrast, the People’s Bank of China (PBOC)- the country’s central bank, hiked interest rates six times between March and December 2007 to cool the overheated economy growth, with the one-year deposit rate rising from 2.52 percent to the 4.14 percent.

These opposing actions created a disparity that helped to lure global speculative money to into China at an accelerated pace this year.

Stepping up the battle against “hot money” flowing into and out of China, three Chinese central governmental departments have decided, in their latest efforts, to link their internal electronic systems from next month in a trial check of foreign exchange receipts and exports settlements.

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