China Takes Steps to Cool Down “Hot Money”

Although acknowledging that no rules can completely halt speculative capital, Chinese officials have found it necessary to take this step to curb speculative capital flowing into the country under the pretext of trade. It is estimated that hot money amounted to almost US$148 billion during the first five months of 2008. Analysts estimate that since 2005, up to US$600 billion in hot money has flowed into China. A large portion of hot money is generated by inflated invoicing of exports and overstating foreign direct investment, as well as illegal banking channels. Monitoring of deferred import payments is also being investigated, which could put a stop to future outflows of capital from China.

Since China broke the yuan-dollar link three years ago, the yuan has risen by 21 percent. This is believed to be mainly as a result of overseas investors buying Chinese stocks and property, as well as an increase in exports, which pushed the trade surplus to a record high. The unprecedented inflows of cash served to push inflation up from the rate of 4.5 percent last year, to 8.1 percent in the first five months of this year.

Monitoring trade of goods is likely to be relatively easy, but when it comes to monitoring trade of services the going gets a little tougher. China’s services trade, which includes tourism, transport, marketing, franchising and insurance, generated US$122.2 billion in foreign-currency income in 2007, representing an increase of 33 percent over the previous year. The value of exported goods in the same period amounted to US$1.2 trillion representing an increase of 26 percent. One of the main drawbacks of monitoring cross-border services is that there is no set standard of checking whether prices being charged are fair or not. Officials and analysts will explore all avenues in an effort to set workable standards.