China faces a threat of "abnormal" cross-border capital flow because of global financial tumult, the country's foreign exchange regulator said on January 6.

Such capital movement, resulting from the world economic slowdown and financial crisis, will bring with it potential risks, said Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE).

China has cut interest rates and seen its economy slowing down since the global financial crisis hit the country's exporters. That could reduce its attraction to foreign investors and lead to capital outflows.

More money flowing out of the border could increase the risk of liquidity strain in the country, which is especially dangerous amid the global financial crisis.

"Where the money will flow to is quite uncertain," Hu was quoted as saying in a statement on the SAFE website.

China's foreign exchange reserves had fallen for the first time since December 2003, Cai Qiusheng, a SAFE official, told a conference last month. He didn't give specific data of when that happened or by how much.

He said the current reserves were below US$1.9 trillion, the level recorded at the end of September. It was the largest reserve in the world.

The SAFE will improve management on fund flows in and out of the border and more closely monitor the balance of payments, said Hu.

He urged for better risk control in managing foreign exchange reserves, which was "the last safeguard" against risks.

China's central bank said yesterday it will also strengthen scrutiny of cross-border capital flows and study ways to tackle "abnormal changes" in the balance of payments.

The People's Bank of China said it will check the validity of trade payments and step up supervision on individuals carrying foreign currencies in and out of the country.

(Xinhua News Agency January 7, 2009)