Regulators have been playing down the amount and impact of
speculative foreign investment over the past year, but the director
of the State Administration of Foreign Exchange said there could be
"no end of trouble in future" if local governments aren't made more
aware of its risks.
Guo Shuqing was speaking today to Xinhua on the sidelines of the
annual session of the National Committee of the Chinese People's
Political Consultative Conference, the country's top advisory
body.
"Foreign exchange administration departments and other
macroeconomic units are investigating the issue and will severely
punish illegal activities."
Foreign exchange reserves added as much as US$206.7 billion last
year alone. Guo said the overall inflow of capital was "normal and
legal" and reflects the "market scenario," but that there are some
"worrisome" problems.
'Fake foreign investment' was used to speculatively
purchase renminbi-denominated assets and commercial housing, he
noted. These kinds of funds are called reqian, literally
'hot money,' in Chinese.
The foreign exchange administration found that people from
overseas had bought dozens of apartments in coastal cities, some
even more than 100, and that this was "obviously not for their own
use," he said.
This kind of 'hot money' pushes housing prices to a very high
level, making cities look prosperous, but does no good to the
investment climate as it leads to higher living and business
costs.
Typically, this means greater risks for local financial
institutions, enterprises and even individuals. When the real
estate bubble bursts, they will suffer huge losses, Guo
explained.
Speculative investment also sneaked into China in capital
accounts or based on no real trade, Guo pointed out.
He emphasized that every locality or foreign-funded enterprise
in the country is obliged to abide by foreign exchange
administration rules.
"Capital inflow is an important part of China's overseas
economy. We hope all sides join hands with us to restrain
speculative capital."
Outstanding foreign debts surged 18 percent year-on-year to
US$228.6 billion by the end of 2004. Typically, the ratio of
short-term debts -- which should be serviced within one year -- to
the total reached 45.6 percent, beyond the internationally accepted
safety threshold of 40 percent.
Guo said the foreign exchange reserve -- hitting US$609.9
billion at the end of last year, second only to Japan -- is quite
enough to pay the debts. But for a single firm, its debts in
foreign currency may snowball to an amount that engenders
"systematic risks."
He revealed that new foreign exchange reserves last year
included US$60.6 billion in foreign direct investment, US$32
billion in trade surplus as calculated by customs, US$30 billion
from foreign exchange clearing under the account of imports and
exports by enterprises, US$35 billion in foreign debts, over US$10
billion in service trade surplus, US$30 billion in individual asset
transfer and earnings and over US$10 billion in securities
investment.
Excessive foreign exchange reserves have long been an excuse
used by some countries, especially the US, to demand appreciation
of the yuan, which now floats within a narrow band against the US
dollar.
Premier Wen Jiabao reiterated in his government work report on
Saturday that the yuan will be kept "basically stable" at a
rational equilibrium, while vowing to improve the exchange rate
mechanism.
Also today, the director of the Gansu provincial branch of the
Industrial and Commercial Bank of China said that special
anti-money laundering regulations were urgently needed to fill in
current loopholes.
Zhao Peng, also a deputy to the National People's Congress, said
a supervision system that covers banking, securities and insurance
is necessary.
People's Bank of China Deputy Governor Li Ruogu said earlier that
China would become a full member of the Financial Action Task Force
on Money Laundering in the middle of this year if everything goes
smoothly, an effort to enhance global cooperation in this
regard.
(Xinhua News Agency March 11, 2005)