China sees only ant hill of hot money: SAFE

08:38, February 18, 2011      

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China has only seen a moderate growth in speculative "hot money" inflows in 2010, said the government's foreign exchange regulator yesterday, despite the extraordinary loose monetary policy by the US Federal Reserve to prop up its flagging economy.

A good number of Chinese economists have criticized the Federal Reserve for releasing the so-called "quantitative easing" policies, but the State Foreign Exchange Administration (SAFE) said yesterday that it only detected $35.5 billion of hot money slipping into China, which was relatively "very small-scale" as compared to the size of China's economy.

SAFE, in announcing the figure, said speculative cash made up "a relatively small portion" of the foreign exchange reserves China attracted in 2010.

Illicit cash inflows were more like "ants moving home", coming in bits and pieces via multiple deals and transactions, the regulator said.

Also yesterday, the Ministry of Commerce said that foreign direct investment rose 23.4 percent in January from a year earlier, as the country attracted $10 billion. The January figure compares to growth of 15.6 percent in December, when $14.1 billion in investment flowed into China.

Foreign direct investment (FDI) hit a full-year record of $105.8 billion in 2010, the ministry said last month, reflecting growing foreign confidence in the economy.

The massive build-up in the country's forex reserves, which hit a historical high of $2.85 trillion at the end of last year, has many analysts to speculate that large inflows of overseas hot money were evading China's rather strict capital controls and finding their way into the local equity markets, particularly the red-hot property market.

But SAFE said it did not find huge influx of overseas hot money. "We have not found evidence of any large-scale capital inflows coordinated by any established financial institutions," the regulator said.

This is the first time that China announced an official estimation of "hot money" inflows.The figure accounted for 7.6 percent of the increase in foreign exchange reserves from 2009, SAFE said.

But, Liu Mingkang, chairman of the government's banking regulatory committee, said in December that increasing speculative capital inflows would make China's policymakers more difficult to curb inflation.

And, Zhou Xiaochuan, governor of China's central bank, said in November that he was confident China's solid measures can manage the inflow risks posed by US quantitative-easing policies. He urged the use of a "pool" to absorb hot money inflows to the nation. Foreign exchange reserves are an example of such a pool, Zhou said.

"We should keep an eye on capital inflow, but we need to remember that it is impossible to shut the door completely," he said then.

And, SAFE warned that it would become increasingly difficult to curb speculative cash inflows as China continues to integrate into the world's economy.

"Many cross-border arbitrage activities, betting on China's economic growth and the appreciation of yuan-denominated assets, stay in the country under the cover of long-term investment and are hard to distinguish using conventional measures," it said.

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