Central bank: Huge capital influx poses hazards

By Li Huayu (chinadaily.com.cn)
Updated: 2008-03-20 11:00

Large inflows of international capital in recent years have challenged emerging economies in their ability to maneuver, the central bank said in a report yesterday, voicing concerns over net capital influx.

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According to the report, the flood of international capital coming into emerging economies undermines the stability of their currency values. Mounting foreign exchange reserves complicate their monetary measures, while irregular and speculative moves in short-term capital make macroeconomic control tougher.

Global foreign direct investment (FDI) inflows grew 17.8 percent year on year in 2007 to an estimated $1.5 trillion, surpassing the previous record set in 2000, according to investment experts with the United Nations Conference on Trade and Development. Statistics show that in the first half of 2007, China received as much as $58.3 billion in net FDI.

The global liquidity problem may stay for a while, said the report, as major developed nations may continue to relax monetary regulation. Furthermore, the Fed could possibly cut interest rates again and some developing economies are expected to pursue looser monetary policies as well.

Hedge funds, private equity funds and sovereign wealth funds have been very active in the world's financial markets, the report said. "The problems and risks resulting from hedge funds are evident. However, sovereign wealth funds serve to stabilize the world's financial market."

The report said that sovereign wealth funds mostly seek long-term investment, with more focus on the substantial economy, and played a big role in stabilizing the financial market during the US subprime crisis.


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