Markets calling for widened investment channels.
Ding Zhijie suggests that to facilitate investment in industry and finance China should promote more financial derivatives in the market by expanding the amount and scope of QDII. With regard to the state foreign exchange reserves, China should expand and optimize the portfolio in order to improve its effective application. "Through these measures we can redress the imbalance between international revenue and expenditure and reduce risks generated by hot money, moving towards 'stockpiling funds in the hands of the people',"he said.
"What we need to address now is how to make better use of the reserves and the returns they bring, to monitor and obviate risks, benefiting those who hold deposits in the banks. This is the ultimate solution to the fast growth of foreign exchange reserves," he added.
What is hot money?
Hot money, also called floating money, is short-term speculative capital. It features high liquidity and low traceability. Its presence generally signals financial turbulence, targeting foreign exchanges and stock markets and their derivatives.
Hot money is one of the principal sources of financial market crises. One of the most important factors behind the Mexican financial crisis in 1994 and Asian financial turbulence in 1997 was the impact of hot money. Both Mexico and Southeast Asian countries relaxed their vigilance and allowed the free inflow of capital, bringing in substantial levels of international hot money. An excess of bad debts, an increase in foreign loans, the expansion of domestic and foreign currency interest margins, and a drop in exports all intensified the problem. Hot money caused significant fluctuations in the market, and then pulled out quickly after profiteering from its speculation, leaving these countries in severe financial turmoil.
(China.org.cn by Yang Xi & Fan Junmei, June 27, 2008)
