2009-11-27 07:53

After a string of emerging countries - including India, Indonesia, Thailand and Brazil - began to target the flow of short-term speculative capital, many experts believe China will step up its efforts to control the flow of so-called hot money.

The deputy governor of China's central bank, Yi Gang, said on Wednesday Chinese authorities will increase surveillance on flows of speculative money. And on the same day, the State Administration of Foreign Exchange tightened rules on individuals transferring yuan and foreign exchange between bank accounts.

Many analysts interpreted the rules as a way to control cross-border transfers, an important channel for hot money flowing into China.

Under the rules, individuals and companies from overseas can no longer send foreign currency to five or more Chinese individuals for conversion into yuan on a single day or on consecutive days.

In addition to more scrutiny of cross-border fund flows, China's policymakers are "likely to increase support for outbound investments", said Jing Ulrich, chairman of China Equities and Commodities at JPMorgan.

However, Liu Yuhui, director of the Center for Chinese Economic Evaluation at the Chinese Academy of Social Sciences, warned that the rule may have limited impact on the influx of hot money, because there are other ways speculative capital can enter China - including through current accounts.

Although there is no official data on how much hot money flows into China, Liu and other economists believe it is substantial.

"Since the second quarter of this year, there has been a mysterious infusion of about $30 billion poured into the nation's already huge foreign exchange reserves each month," said Liu.

Wang Yuanhong, senior economist with the State Information Center, said China is attractive to speculators because equity and property prices are at a relative low level and because there are fewer risks of policy tightening this year than next year.

Hot money has already helped fuel bubbles in the equity and property markets and added inflationary pressures.

Shanghai's dollar-denominated B-share index plunged 7.3 percent on Tuesday, after surging 26 percent earlier this month. Analysts blamed the rise on hopes that China would allow the yuan to appreciate. They suspect Tuesday's fall was down to a cooling off of such talk.

Li Wenjie, general manager of property agency Centaline China (North China region), told China Daily there had been a strong speculative sentiment in China's property market since mid-2009 and confirmed that many foreign investors were buying apartments in China, betting on surging property prices.

Chinese authorities will soon find themselves in a trap. Once the country starts to see inflation in 2010, the obvious response will be to appreciate the currency or raise interest rates, both of which will attract more hot money and fuel inflation.

The dilemma is deepened by recent indications that the US Federal Reserve may hold its rates steady until 2011.