China's foreign exchange chief Guo Shuqing on Friday told local governments not to lure foreign investment "haphazardly", in a rare, stern warning against the inflow of speculative funds, or "hot money" in the name of investment.

Regulators have been playing down the amount and impact of "hot money" over the past year, but Guo, director of the State Administration of Foreign Exchange (SAFE), said the country might see "no end of trouble for the future" unless local governments are acutely aware of risk mitigation in soaking in foreign funds.

"China pays great attention to speculative funds," Guo said in an interview with Xinhua on the sidelines of the annual session of the National Committee of the Chinese People's Political Consultative Conference, China's top advisory body.

"Foreign exchange administration departments and other macro-economic departments are investigating the issue and will punish illegal activities severely."

Foreign exchange reserve added as much as 206.7 billion US dollars last year alone. Guo said the overall inflow of capital is "normal and legal" and reflects the "market scenario", but there are also some "worrisome" problems.

"Fake foreign investment" was actually used to purchase renminbi-denominated assets and commercial housing on speculative purpose, he noted.

The SAFE has found some overseas people bought dozens of, even more than 100 apartments in China's coastal cities -- "obviously not for their own residing purpose", he said.

The "hot money" pushed housing prices to a very high level, making the cities look "prosperous", but does no good to investment climate as it leads to higher living and business costs.

Typically, this means great risks for local financial institutions, enterprises and even individuals. When the real estate bubble bursts, they will suffer from huge losses, Guo explained.

"Hot money" also sneaked into China under 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 relevant sides join hands with us to restrain speculative capital."

Outstanding foreign debts surged 18 percent year-on-year to 228.6 billion US dollars by the end of last year. 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 line of 40 percent.

Guo said the country's foreign exchange reserve -- hitting 609.9 billion US dollars at the end of 2004, 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 newly-added foreign exchange reserve last year include 60.6 billion dollars in foreign direct investment, 32 billion dollars in trade surplus as calculated by the customs, 30 billion dollars from foreign exchange clearing under the account of imports and exports by enterprises, 35 billion dollars in foreign debts, more than ten billion dollars in service trade surplus, 30 billion dollars in individual asset transfer and earnings being brought about and more than 10 billion dollars in securities investment, among others.

Mountains of foreign exchange reserve has long been an excuse used by some countries, especially the United States, to demand appreciation of the yuan, which now floats against the US dollar within a narrow band.

Premier Wen Jiabao reiterated in his government work report Saturday that China, however, will keep the yuan "basically stable" at a rational equilibrium, while vowing to ameliorate the exchange rate determination mechanism.

(Xinhua News Agency March 11, 2005)