SAFE:No big hot money flows into nation

By Lan Lan (China Daily)
Updated: 2010-05-26 10:28
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But SAFE admits 'small-scale' speculative funds entered realty

BEIJING - China is not facing large-scale cross-border inflows of hot money, the country's foreign exchange regulator said on Tuesday as concerns grow about rising speculative foreign capital.

But the State Administration of Foreign Exchange (SAFE) admitted that "small-scale speculative funds have flowed into the property sector in one way or another" despite the country's regular checks for irregular capital flows.

Due to the relatively high interest rate in China compared with the United States and growing expectations of yuan appreciation, concerns have mounted that a large amount of speculative funds have been flowing into China.

But "judging from our investigation, cross-border capital flows and foreign exchange settlement in China largely complies with the law and we have yet to find organized and large-scale inflows of 'hot money'," SAFE said in a statement.

In the latest investigation into cross-border money flows carried out in 13 provinces and cities, the regulator found 190 suspected irregularities valued at $7.35 billion.

Six cases involving more than $2.7 million have been finalized, it said. The investigation started in February.

The illegal flows of hot money mainly came through traditional trade and investment channels such as general trade, service trade, foreign direct investment, banks as well as individual channels, and entered hot investment sectors such as property to make a profit.

Some commercial banks failed to strictly enforce relevant regulations and even assisted in violating the regulatory regime.

But the statement didn't name the banks involved.

Inflows of speculative foreign capital are expected to continue to increase amid expectations of yuan appreciation and a hike in interest rates, said analysts.

Interest-rate gaps between Chinese and foreign currencies are a major contributor to the increase in speculative capital inflows, said Qin Long, an analyst at China Merchants Securities.

China's benchmark one-year deposit rate is 2.25 percent, while interest rates in the United States remain near zero.

Analysts said the possibility of an interest rate hike in the United States is remote, which means that international capital will continue to flow into countries such as China.

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Moreover, capital inflows have increased since the second half of 2009 due to growing expectations of yuan appreciation, analysts said.

China has kept the yuan pegged at about 6.83 to the dollar since mid-2008 and analysts said it could rise especially in the wake of the two-day China-US Strategic and Economic Dialogue (S&ED), which concluded on Tuesday.

President Hu Jintao has promised the country would continue to reform its foreign exchange rate regime.

According to Shanghai Securities News, speculative capital inflows into China in the first three months amounted to $21.3 billion, $12.7 billion and $37.3 billion respectively. The estimated sum for April is $45.8 billion.

Overall, an estimated $71.5 billion in "hot money" flowed into China in the first quarter, more than the total sum in 2009, which hit $69.5 billion.

Inflows of hot money are escalating compared with last year, but the pace is slower than the peak period in 2007 and 2008, said Qin.