Strong yuan attracts increase in hot money

(Shanghai Daily)

08:16, September 22, 2011

Shanghai--China is attracting a rising amount of speculative capital, or hot money, as investors bet on the nation's growth and prospects for gains in the yuan.

The central bank said yesterday that financial institutions' influx of foreign capital jumped by 72 percent in August from July.

Their yuan positions saw a net gain of 376.94 billion yuan (US$59.1 billion) last month, the biggest increase in five months, according to the People's Bank of China's monthly report.

In July, inflows of capital shrank 20.8 percent from a month earlier to 219.6 billion yuan. Average monthly yuan foreign exchange purchases last year were about 272 billion yuan.

Part of the foreign capital comes into the country in the form of foreign direct investment and trade, both easily tracked. The rest is usually considered hot money since it is hard to monitor.

FDI in China expanded 11.1 percent from a year earlier to US$8.45 billion in August, the Ministry of Commerce said last week. Last month's FDI growth, however, eased from 19.8 percent in July.

Meanwhile, better-than-expected imports helped reduce China's trade surplus to US$17.7 billion last month.

This means a total of US$32.95 billion in August could be hot money.

"The attraction of China is not only in the prospects of a rising currency but also stable economic performance and higher investment returns," Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd, said yesterday. "US Treasuries yield is now below 2 percent and Europe is facing a crisis, so China offers stability and better returns in addition to the prospect of yuan appreciation." 

The International Monetary Fund on Tuesday lowered its growth prospect for China to 9.5 percent from 9.6 percent earlier this year, compared with 1.5 percent prospect for the United States and 1.6 percent for the 17 euro countries.

The yuan has appreciated more than 6.7 percent since last June, when the yuan's two-year de facto peg against the dollar ended. It advanced to its strongest level in three weeks yesterday on signs policy makers will tolerate currency gains to fight inflation in China. The central bank set the reference rate 0.17 percent stronger at 6.3772 per dollar, the highest since 2005. 

Most economists say the yuan could appreciate to 6.30 against the dollar by the end of the year.

The rising amount of inflow capital, however, could compromise efforts to bring down high inflation and contain bubbles in some areas such as real estate industry.

"The authority is not likely to allow the yuan to see a further quick rise right now given the financial troubles in overseas countries," Wang Guobin, an analyst with Northeast Securities, said. "The rising forex purchase reflects the result of yuan's quick appreciation in August." 

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