The foreign exchange regulator yesterday vowed to strengthen
controls over illegal capital that has been flowing into the stock
and property markets.
"Speculative capital has flown into the country under the guise
of trade and investment," Deng Xianhong, deputy head of the State
Administration of Foreign Exchange (SAFE), said in a statement.
"The capital inflows have, to some extent, affected the domestic
macro-economic situation and healthy economic development," he
said.
With the domestic market flush with excess liquidity, the
authorities have been trying to block the inflow of speculative
capital seeking to benefit from a rising yuan.
Some of the hot money is from short-term foreign borrowings,
which is why the regulator has been keeping a close watch on
short-term foreign debt, said Zhao Xijun, finance professor at
Renmin University of China.
By the end of last year, the SAFE said, China's short-term
foreign borrowings increased by 16 percent year on year.
About 57 percent of the foreign debt was short-term by the end
of 2006, compared to 55.8 percent by the end of last June.
Hu Xiaolian, director of the SAFE, said the watchdog will launch
a nationwide check on banks' control of short-term foreign
debt.
Hu, who is also the vice-governor of central bank, said the
priorities for the SAFE are to supervise speculative capital
inflows, strengthen monitoring and management of cross-border
flows, especially short-term capital flows, and control foreign
capital inflows with fictitious trade background and bloated
exports.
Economists are not in agreement on the exact amount of hot money
in China, but some put the figure at US$300 billion.
They have mostly entered the economy in the form of bank
borrowings, from underground banks, bloated exports or understated
imports, said Zhao.
"The checks by the foreign exchange regulator will help it
figure out how the money came in before it takes countermeasures,"
he told China Daily.
The highly volatile speculative funds pose a big risk, said
Zhuang Jian, senior economist with the Asian Development Bank.
"It will fan speculative sentiment but once it flows out
abruptly, it will deal a blow to the financial system."
Since last year, the SAFE has strengthened checks on illegal
capital inflows and foreign exchange settlements in goods and
service trade and such sectors as real estate and tourism.
It penalized 19 Chinese and 10 foreign banks for violating rules
but did not reveal details.
(China Daily June 27, 2007)