Experts warn of 'hot money' danger in China
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Chinese exporters should brace themselves for a steady rise in the value of the yuan while the steep hiking of asset prices looks set to continue, say analysts studying the movements of "hot money."
Although the value of the yuan, China's currency, has hovered at around 6.83 to the U.S. dollar for the past several months, analysts say the rush of international short-term speculative funds has already begun with China's economy showing signs of improvement.
The country saw a massive exodus of hot money because of the global financial crisis in the fourth quarter of last year and the first quarter of this year, said Zhang Ming, an economist with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.
From the second quarter, the situation reversed with an influx of hot money, he said.
No official figures concerning hot money have been released, but analysts have compiled a scratchy picture from the unusual coincidence of China's increasing foreign exchange reserves and declining trade surplus and reduced expenditure of foreign investment in China.
Zhang estimated the amount of hot money inflow at 88 billion U.S. dollars from the second quarter.
Analysts normally calculate hot money by deducting foreign direct investment and a trade surplus from the country's foreign exchange reserve increase.
"The shrinking trade surplus and expanding forex reserves in the third quarter this year indicate hot money influx is rising again," said Sun Mingchun, chief China economist of Nomura Securities.
"The inflow will not only put further appreciation pressure on the currency, but also create more liquidity and fuel inflation of the country's asset prices," he said.
"With a large hot money inflow, China will have no choice but to let the yuan appreciate or to create more liquidity in order to maintain a stable foreign exchange rate," said Zhuang Jian, a senior economist with the Asian Development Bank.
Once the yuan appreciated, profit margins of China's exporters, already suffering from falling orders, would be further squeezed as their products would become more expensive and less competitive, Zhuang said.
Hot money flows into China through multiple channels, including falsified international trade with over-invoiced exports and underground private banks.
Zhang said hot money would continue flowing into China this year and in the first half of 2010 as the attractions remained: strong liquidity, soaring asset prices, increasing anticipation of yuan appreciation and recovery of the U.S. economy.
China was facing renewed pressure to let the yuan strengthen as an "undervalued yuan" was again the focus of international conferences, including the gathering of the Group of Seven (G7) and the Group of 20 (G20), and the U.S. dollar weakened, he said.
Although Chinese equity prices had fallen sharply since August, they still had room to increase during the rest of this year, he said, and housing prices, already very high, were likely to continue rising.
The hot money inflow was also a result of the Chinese economy performing better than those of other countries, Sun said.
The world's third largest economy, China's economy grew 7.1 percent in the first half. Although it was much lower than the double-digit annual growth during the 2003-2007 period and the first two quarters of last year, it was still among the fastest-growing economies in the world.
The government set an annual target of 8 percent for this year, which would not be a problem, Xiong Bilin, an official with the National Development and Reform Commission, the country's top economic planner, said Monday.
However, Zhang warned the asset bubble could burst if hot money flowed out, which was also likely to cause depreciation of the yuan in the short term.
"To avoid such situations, the Chinese government must take precautionary measures, such as enhancing supervision of capital flows into and out of the country, adjustment of domestic credit policy and reining in asset prices by increasing supply," he said.
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