China's foreign-exchange authorities yesterday announced a probe into forex acceptance and settlement operations by banks.

Analysts said it was possibly aimed at what was believed to be massive inflows of speculative capital into the country this year.

The State Administration of Foreign Exchange said: "At present, China's foreign-exchange situation is healthy overall, but there are also some new phenomena.

"Inspecting the banks will help (the administration) obtain first-hand information on the flow of forex funds and understand the new characteristics of the forex situation."

The probe will include self-inspections by designated forex banks and on-site check-ups by the commission, the administration said.

China's forex reserves rose by a hefty US$60.1 billion in the first half of this year, outstripping the combination of a US$4.5 billion trade surplus and US$30.3 billion in actual foreign direct investment by more than US$25 billion.

That discrepancy, many economists suspect, was a result of inflows of "hot money" used to bet on an appreciation in the exchange rate of the local currency, the yuan or renminbi. But, despite calls by some foreign countries to revalue its currency, the Chinese Government has said it would not let the yuan appreciate, this year at least.

Zhang Yaxiong, a senior analyst with the State Information Center, a government think-tank, said: "That (the discrepancy) is probably what it (the forex probe) is aimed at." He said expectations that the yuan will appreciate have been a major force driving the forex inflow into China. The trend has been reinforced by the country's forex administration practice, which traditionally involves stricter controls on the outflow of forex funds, which were seen for years as a precious financial resource.

The anticipation that the yuan will rise led to an unexpected reversal last year in China's balance of international payments. Errors and omissions, a category that largely encompasses unreported flows of funds, shifted to the positive after years of being in the negative.

"The direction of the flow has changed," Zhang said.

The administration said the probe was a move to ensure compliance with forex management rules on the part of banks, help its analysis of foreign capital inflows and trends in the international balance of payments, as well as to clamp down on "illegal cross-border capital flows."

(China Daily August 27, 2003)