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Where will hot money go?

By Rong Xiandong (Chinadaily.com.cn Staff Writer)
Updated: 2008-08-07 22:22

Analysts noted that speculative funds, which have greatly profited from China's robust economic growth and once-sizzling property market in the past several years, might withdraw from China as the Chinese currency, the renminbi, reaches the peak of the current cycle of appreciation.

The renminbi has gained 7 percent against the dollar this year and 21 percent since a fixed exchange rate was discontinued in July 2005, making it the best performer among Asian currencies.

International speculative funds have rushed to China to bet on a strong yuan, taking advantages of the differences between China's interest rates and the US levels.

Li Daokui, dean of the Finance Department of the prestigious Tsinghua University. [File photo]

Li Daokui, dean of the Finance Department of the prestigious Tsinghua University, echoed Li Youhuan's view. He said: "China should remain wary of hot money inflows turning into outflows, although the continued subprime credit crunch and the new turmoil in the financial markets in the US reduce the risks of hot money flowing out of China."

He noted short-term speculative capital outflows are more risky than inflows, as the latter only pushes up product and asset prices and stokes inflation, while sudden outflows of a large amount of hot money at the same time will pose a threat to the financial markets and the national economy.

Therefore, he suggested the government tighten control of hot money outflows to effectively curb hot money speculation as speculative capital will hesitate to enter China if it has difficulty to exit the country.

In an effort to tighten scrutiny over hot money, the government announced new rules last month to make it mandatory for companies to provide evidence to the State Administration of Foreign Exchange for verification from July 14.

Exporters are required to park their export receipts in temporary verification accounts till they are cleared as genuine trade revenue. The Ministry of Commerce and the General Administration of Customs will work with the foreign exchange regulator in implementing the new rules through a nationwide computerized network.

In its latest move to check hot money flows, the government issued revised rules on the management of foreign exchange on August 6, 2008, which mete out heavy penalties for improper currency transfer and conversion.

According to the new regulations, unauthorized inward or outward transfers of foreign exchange will face penalties of up to 30 percent of the capital. The rules took effect immediately.

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