How did over US$1 trillion of hot money flow into China in
the first half alone despite the nation's strict control on foreign
exchange?
According to statistics from the Ministry of Commerce and from
Chinese customs, US$1,209 billion added to China's foreign reserves
came from unknown sources.
In an analysis by International Financial News, money can
enter China through illegal channels including massive payments or
money transfers through fictitious trade claims or false contracts
under the guise of normal trade and investment.
Direct investment is another way for hot money to enter China's
market, according to some experts. Except for industrial and
commercial investment, which has few limitations for settlement of
foreign currency, the Qualified Foreign Institutional Investors
(QDII) system is more lenient in allowing foreign investors to
change their funds into renminbi and buy securities.
The influx of hot money could pressure the central bank in terms
of currency supply and cause serious liquidity problems. It could
also disturb the monetary policy of the government, and even
endanger the nation's financial security, according to the
report.
So far, the government has taken a series of measures to curb
the illegal inflow of hot money and guide foreign investment in a
reasonable way. However, some experts said it is hard for the
government to eliminate hot money altogether, because the country
had committed to reforming its financial system and making it more
open internationally.
According to Mei Xinyu, an official with the economy and trade
research department of the Ministry of Commerce, it is impossible
to rid the country of overseas speculative funds completely, since
the money itself was a product of excess global liquidity.
Financial authorities of all nations should work together and
gradually bring it under control. Therefore, curbing hot money
requires a more long-term campaign.
(China Daily August 9, 2007)
