Foreign exchange reserve growth that cannot be explained by the current account surplus and a net influx of foreign direct investment increased in the first half of this year, potentially signaling a hot money influx, said Ha Jiming, chief economist of China International Capital Corporation Limited, yesterday.

Ha believes in a moderately accelerated renminbi appreciation and that the pace of promoting monetary outflows should also be stepped up.

The State Administration of Foreign Exchange recently released China's balance of international payments for the first half of this year.

The current account surplus reached US$162.9 billion in the first half of 2007, up 78 percent year-on-year and accounting for 11.8 percent of GDP. The imbalance in international payments is even more severe, according to Ha.

Capital account surplus also increased greatly. The item of net error and omissions in the international payments hit US$13.1 billion in the first half year, a growth of US$21.5 billion year-on-year. The chunk of foreign exchange reserve growth that cannot be explained by the current account surplus and net influx of foreign direct investment reached US$52.5 billion, accounting for nearly 20 percent of the total increase in foreign exchange reserves.

With the depreciating dollar in the background, global excess liquidity and the influx of a great deal of capital into the newly-emerging markets pushed up capital market risks in these markets. China should adopt measures to prevent from asset price bubble, Ha emphasized.

Ha said that China must choose between speed and stability in its exchange rate appreciation. Slower appreciation will have less influence on exports, but it will take longer time. This will lead to a continuous fund influx in current account and capital account. The domestic excess liquidity will be more severe following speculative hot money. Moderately accelerated appreciation will shorten the appreciation period, strengthen the effectiveness of monetary policy and lower imported inflation.

Another potential policy alternative is to create a capital efflux.

Renminbi appreciation may reach 6.5 percent for the year, with 7.3 yuan against the US dollar, Ha predicted. Renminbi will appreciate seven percent for the whole year of next year, hitting 6.79 yuan against the US dollar by the end of next year.

Ha maintains that the interest rates may rise by 27-54 basis points this year but the imperativeness of interest rates hike is lowered.

(Chinadaily.com.cn November 7, 2007)