China's foreign-exchange authorities yesterday announced a probe
into forex acceptance and settlement operations by banks.
Analysts said the investigation was almost certainly aimed at
what was believed to be massive inflows of speculative capital into
the country this year.
At present, China's foreign-exchange situation is healthy
overall, but there are some new phenomena, said the State
Administration of Foreign Exchange.
"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 by more than US$25 billion
the combination of a US$4.5 billion trade surplus and US$30.3
billion in actual foreign-direct investment.
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 renminbi.
Despite calls by some countries for China to revalue its
currency, the central government has said it would not let the yuan
appreciate, at least not this year.
"That (the discrepancy) is probably what it (the forex probe) is
aimed at," said Zhang Yaxiong, a senior analyst with the State
Information Centre, a government think-tank.
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," said Zhang.
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)