The topic of speculation of international hot money on yuan appreciation is really a hot button at the second International Financial Forum held in Hebei Province from November 11 to 13.

China's trade surplus for the first 10 months of the year recorded at 7.1 billion USD. But it still stood at 4 billion USD by the end of September.

The sharp swelling of the surplus is deemed to be a result of collaboration between some businesses and overseas hot money by inflating their export volumes and then exchanging the created forex revenue into RMB. Their attempt is to cash in on yuan appreciation which they bet will happen soon.

In China's some 510 billion USD forex reserve, there is around 100 billion USD trade surplus and about 300 billion USD foreign direct investment. The remaining 100 billion USD is hot money.

Hot money also influxes into China through any other possible channels. It seeks for access into the market by purchasing Chinese corporate and government bonds, making presence in the domestic stock market as QFII or fund, or setting up affiliates or joint ventures.

Investment on hot money, explained Zhao Haikuan, honorary director of the Financial Institute of the People��s Bank of China, is a speculative move for quick and generous profits. And the hot money flowing into China now is eyeing the interest rate spread and arbitrage.

However, Zhao insisted the hot money would have nothing but faint impact on the interest rate and exchange rate of the Chinese currency.

He stressed that it would be the national macro-economic policy, instead of the hot money that would justify the RMB revaluation. The exchange rate of yuan is not decided by the market, but the policy. As Chinese currency is pegged at US dollars, it goes up and down the same way as US dollars.

Zhao's idea is shared by Wu Nianlu, vice chairman of China International Financial Society. He reminded us another fact that China practices managed floating forex exchange regime which does not allow free flow of foreign capital.

Reasons are always required before any foreign investment is made in China. Hot money has no easy chance to flow out of China in terms of forex once it enters into the country. Any attempt of speculation on yuan appreciation, as Wu described, would be ridiculous and groundless. There will be no impact on the value of RMB.

Wu recognized the benefits of stronger yuan on oil imports. However, for RMB, he thought it was more a question of building a more reasonable and better forex rate system rather than the revaluation.

In the future, the foreign exchange rate of RMB will depend on the market. And RMB will be pegged at various currencies in addition to the greenback. The true value of RMB will be subject to fluctuation of these currencies.

If the hot money entering into China does not generate profits from the interest rate spread or find exits out of China, it will naturally resort to short-term investment.

In one scenario, the hot money slips into the stock market and bond market where it pushes the prices high. Investors trying to ride on the wave of the price buoyance will find themselves trapped when the hot money is withdrawn.

The same scenario could be seen on the property market. Hot money is always interested in sectors which seem lucrative and easily accessible.

In addition, the influx of hot money into China brings more yuan in circulation. This in turn will add to the risk of inflation which is already looming there.

Zhao argued that it was merely not possible to keep prices unchanged in a market economy. "We have made calculations. A price hike of 2 to 3 percent with an economic growth speed at 8 to 9 percent is a perfect recipe to the production and consumption of the whole society. But now prices have been rising more than 3 percent for the past months. This is really alarming." He said.

By People's Daily Online