According to recent media reports, an estimated 300 billion yuan of overseas hot money is now operating in China, citing a report that tracks the flow of this capital after it enters the country. The reports also said that a considerable proportion of the capital is now diverted from the stock market to the property market and Guangzhou, Shenzhen, and Shanghai attract the bulk of this transferred capital.

 

Yesterday, Li Youhuan, a researcher from the Guangdong Academy of Social Sciences who participated in the investigation report, made a clarification, saying the estimated total amount of hot money operating in China is US$250 to 300 billion, not yuan.

 

He also explained that the transfer from stocks to property is seen in many cities like Beijing, Tianjin, Shanghai, and Guangzhou and it is hard to judge which cities are their major targets.

 

Li's team, entrusted by government departments, began to track the flow of overseas hot money last October and their findings are based on individual case studies and questionnaires with underground banks.

 

Their investigation found that, beginning this year, some hot money is being diverted from the stock market to the property market, a practice confirmed by some real estate firms.

 

May 30 marks a clear division for the change. On that day, Chinese shares closed sharply lower, with the benchmark Shanghai Composite Index down 6.5 percent, from the previous close, after the Ministry of Finance announced that it would raise the stamp tax on securities trading from the previous 0.1 percent to 0.3 percent beginning May 30.

 

Before May 30, most of the hot money was invested in the bullish stock market; after the tax adjustment, most speculators withdrew their money from the risky stock market and invested it in the relatively stable property market.

 

However, the exact amount of money that was diverted is difficult to calculate and it is also difficult to judge how much hot money is invested in the stock market and how much in the property market.

 

The major reason for the transfer is that the Chinese stock market is affected too greatly by policy and is not a good way to rapidly increase capital value, the investigation revealed.

 

According to Li, the major form for hot money speculation in the property market is housing purchases through mortgage loans and then hogging up the prices through reselling. Li's team found an individual case where over 100 housing units were bought at the same time. Some speculators choose to set up companies for such a large purchase.

 

Zhao Zhuowen, general manager of TCZY Consultants, said there is a tendency for hot money to enter the Guangzhou property market but it has yet to occur on a large scale. They mainly target high-end properties, instead of middle and low-end residential buildings. However, as hot money is short-term and speculative in nature, they will still help lift prices of residential buildings although not in a direct way.

 

Zhao pointed out that Guangzhou's housing market does not have the necessary restrictions, from land sale to housing purchase. He explained that the city needs a comprehensive restriction system to fend off the influx of hot money.

 

In addition to the housing market, overseas capital is showing growing interest in original issue stock, securities issued when a company is first incorporated, Li's investigation found.

 

"They will buy a large amount of original issue stock from companies that have listing plans and their shares will greatly increase in value when listed, often by a large margin. They are especially interested in original issue stock by state-owned enterprises," according to Li.

 

Purchase of original issue stock of listed companies carries a lot of profit as well as great risks. Once the listing plans are grounded, it will deal a heavy blow to those who have bought the original shares, Li said.

 

(China.org.cn by Yuan Fang, September 14, 2007)