Hot money merely 'an ant hill'
By Zhang Fengming |
February 18, 2011, Friday
|
Print Edition
Print Edition
THE inflow of speculative capital into China in recent years has been no more than "an ant hill," according to the foreign exchange regulator's first-ever public report on the subject.
So-called "hot money" - cash flowing into emerging countries to obtain higher returns - is estimated to have contributed 9 percent to China's new foreign exchange reserves in the past decade.
Last year, the net entry of hot money was estimated at US$35.5 billion, accounting for 7.6 percent of the new foreign reserves in 2010, or 0.6 percent of China's gross domestic product, said the State Administration of Foreign Exchange yesterday.
This suggests that hot money, which can lead to asset bubbles and destabilize economies, is far less of a problem than some observers had feared.
"The amount of hot money inflow in recent years is like an ant hill," the regulator said in its 45-page report. "We haven't found capital inflow from large-scale established institutions."
The argument that cross-border capital flows determined domestic stock market performance lacks supports from the data, it said. The hot money inflow is estimated at US$25 billion annually in the last 10 years, the regulator said.
China recorded a net outflow of US$400 billion hot money between 1994 and 2002, and the trend reversed with an aggregate entry of US$300 billion from 2003 to 2010. Domestic institutions, individuals and overseas Chinese are the major players in moving the hot money into China in scattered cases.
Speculative capital is betting on the yuan's appreciation and China's rapid and stable economic growth prospect. The local currency has risen more than 25 percent since China dropped the peg to the US dollar in July 2005.
The regulator added that the capital flows in and out of China were generally in line with China's real level of economic activities.
But it warned of a huge challenge for emerging economies to confront cross-border capital flows against the backdrop of a loose monetary policy from major developed countries and excess global liquidity. Economists said China's monetary and foreign exchange data already indicated this trend.
Chang Jian, a Barclays Capital economist, said China's strong M2 growth and surge in forex reserves in December are evidence of significant capital inflows.
"It was fueled by yuan appreciation and the expectation of a large and persistent onshore-offshore interest rate differential amid the QE2 (second round of quantitative easing)," Chang said.
China has raised its interest rates three times since October, while rates in the US remain at record low levels.
So-called "hot money" - cash flowing into emerging countries to obtain higher returns - is estimated to have contributed 9 percent to China's new foreign exchange reserves in the past decade.
Last year, the net entry of hot money was estimated at US$35.5 billion, accounting for 7.6 percent of the new foreign reserves in 2010, or 0.6 percent of China's gross domestic product, said the State Administration of Foreign Exchange yesterday.
This suggests that hot money, which can lead to asset bubbles and destabilize economies, is far less of a problem than some observers had feared.
"The amount of hot money inflow in recent years is like an ant hill," the regulator said in its 45-page report. "We haven't found capital inflow from large-scale established institutions."
The argument that cross-border capital flows determined domestic stock market performance lacks supports from the data, it said. The hot money inflow is estimated at US$25 billion annually in the last 10 years, the regulator said.
China recorded a net outflow of US$400 billion hot money between 1994 and 2002, and the trend reversed with an aggregate entry of US$300 billion from 2003 to 2010. Domestic institutions, individuals and overseas Chinese are the major players in moving the hot money into China in scattered cases.
Speculative capital is betting on the yuan's appreciation and China's rapid and stable economic growth prospect. The local currency has risen more than 25 percent since China dropped the peg to the US dollar in July 2005.
The regulator added that the capital flows in and out of China were generally in line with China's real level of economic activities.
But it warned of a huge challenge for emerging economies to confront cross-border capital flows against the backdrop of a loose monetary policy from major developed countries and excess global liquidity. Economists said China's monetary and foreign exchange data already indicated this trend.
Chang Jian, a Barclays Capital economist, said China's strong M2 growth and surge in forex reserves in December are evidence of significant capital inflows.
"It was fueled by yuan appreciation and the expectation of a large and persistent onshore-offshore interest rate differential amid the QE2 (second round of quantitative easing)," Chang said.
China has raised its interest rates three times since October, while rates in the US remain at record low levels.
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