China Cracking Down On “Hot Money”
By Shams Hamid on Oct 13, 2010 with Comments 0
China will persist on preventing speculative money inflows into China and repress illicit foreign exchange activities, China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), announced Tuesday.
Chinese foreign exchange reserves have possibly exceeded US $2.5 trillion by the end of September because of speculative money inflow.
Regulators emphasized that “hot money” flowing into China is “long term and complicated” problem. Regulators have been investigating illegal foreign exchange activities since February in 13 provinces and municipalities.
In July they reported finding 190 cases of hot money worth 7.35 billion US dollars. The report mentioned that speculative money inflows are caused by anticipation of the appreciation of the Chinese currency yuan. Without identifying them, the report blamed some local governments’ failure to pull foreign investment and resorting to hot money.
Yuan dropped 43 basis points to 6.6775 against US dollars on Tuesday after climbing a record high to 6.6732 versus US dollars on Monday. Yuan’s parity with the US dollar is calculated after determining the average price from all the markets before opening the trade each day.
The yuan has increased by 2.2 percent since June 19th, 2010, after the People’s Bank of China (PBOC), the central bank, announced its decision to reform yuan exchange rate management and to enhance exchange rate flexibility. The yuan has climbed 23 percent since July 2005.
The report of the State Administration of Foreign Exchange (SAFE) noted that exchange rate reform does not necessarily mean an appreciation of yuan, it also warned the stakeholders to take stock of the foreign exchange risk.
China has instructed six principal lenders, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the China Merchants Bank and the China Minsheng Bank, to raise their reserves by 50 basic points to 17.5 percent of their deposits.
China’s growth rate of 10.3 percent in the second quarter, and in a quarterly report to be announced next week it is expected to drop to 10 percent for July-September quarter. The policy makers have increased reserve requirements but they have not increased interest rates fearing it may further drop the growth rate.
