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Hot money puzzle creates more heat than light The debate over whether China is attracting more
and more hot money is about to heat up again.
First-quarter data, due by tomorrow, should cast light on whether a
jaw- dropping US$120 billion (HK$936 billion) rise in official reserves in
the first two months was indeed caused by speculative inflows chasing the
yuan higher or, as some economists suggest, by murky central bank
accounting or a surge in foreign-currency borrowing.
The answer is of great policy significance because officials make no
secret that a new flood of hot money and the resulting increase in banking
liquidity might alter the pace at which China adjusts interest rates and
lets the yuan climb.
I see no less incentive for hot money inflows, said Song Guoqing, an
economics professor at Peking University, who rejected the argument that
tumbling Chinese equity prices are deterring capital inflows.
The gains to be made from yuan interest rates plus currency
appreciation are attractive enough, given US rate cuts and instability in
global capital markets, Song said. Chinas one-year certificate of deposit
rate is 4.14 percent, well above the US federal funds target rate of 2.25
percent. In addition, the yuan rose 4.2 percent in the first quarter alone
and many expect a cumulative gain this year of about 10 percent.
That is enough to explain why many wealthy Chinese households rushed at
the start of the year to make use of their annual US$50,000 foreign
exchange conversion quota, said Frank Gong, chief China economist at
JPMorgan Chase.
Everybody wants to do it in January. The later you do it, the worse
rate you get, he said. I think, and the central bank would agree with me,
that Chinese households did the most.
The leap in reserves in January and February dwarfed last years average
monthly rise of US$38.5 billion, sources familiar with the data said.
Anecdotal evidence suggests that a lot of money is coming into China
from Hong Kong, whose citizens may transfer 20,000 yuan (HK$22,257) a day
into an account in the mainland.
A lot of people are doing so, though there are no official statistics
to show how big the inflow is, said Xing Zhiqiang, a senior research at
CICC Securities.
For companies operating in China, borrowing in dollars and repaying the
loan in yuan is also a very profitable exercise.
Foreign currency lending has soared since mid-2007, especially with the
central bank putting the brakes on yuan loans. Banks extended US$15.7
billion and US$21.4 billion in foreign currency credit in January and
February respectively.
Former statistics chief Li Deshui, speaking at last months session of
parliament, cited unidentified research as concluding that there is now
about US$500 billion of hot money in China.
Li called for tighter checks on short- term capital flows a constant
refrain of Chinese regulators.
But, with Chinas economy increasingly open to the world, capital
controls are simply not as effective as they used to be, said central bank
deputy governor Yi Gang. 2008-04-26 |
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