Fending Off Hot Money

By LAN XINZHEN

Fending Off Hot Money

By LAN XINZHEN

Amid uncertainties about the amount of hot money,the government strives to curb the harmful capital

The benchmark Shanghai Composite Index was plagued by dips, climbs and dives as the stock market slumped from 3,186 to 2,838 points in four days, beginning November 12.Sharp fluctuations occurred on the index in the following days.

Figures from Wind Information Co. Ltd.said 250 billion yuan ($37.61 billion) vacated the Chinese stock market in November,while a substantial amount of money invested in the market under the quali fi ed foreign institutional investor (QFII) scheme also pulled out.

Commodity prices in the futures market also fell sharply—zinc and aluminum prices decreased more than 10 percent over the course of two weeks last month.

Analysts believe the stock market surge in the fi rst few months of this year was actually pushed up by hot money,while the recent plunge of the stock and futures market demonstrated the effectiveness of government measures to combat hot money that has been speculated to have been working its way into China.

Striking hot money

There are many reasons for the spike in hot money in China. For instance, some speculators are betting on the appreciation of the yuan, China’s currency; some are relying on the fast economic rally in China; and others are taking advantage of China’s flawed fi nancial supervision.

The U.S. Federal Reserve’s decision to print and release $600 billion into the market aroused concerns from emerging markets currently involved in fighting inflation and excess liquidity.

But the United States has its reasons for taking this action. “At the rate we’re going,it could be four, maybe fi ve years before we are back to a more normal unemployment rate of about 5 percent to 6 percent,” U.S.Federal Reserve Chairman Ben Bernanke told CBS News. The purchase of more bonds than planned is “certainly possible,”he said. “It depends on the efficacy of the program” and the outlook for inflation and the economy.

The program, known as quantitative easing (QE), has been criticized by of fi cials around the world, including those in China and Germany. Their primary concern is that this round of QE, known as QE2, would drive down the value of the dollar and cause a surge of capital abroad that would create asset-price bubbles.

China, as the major driver of the post-crisis economic recovery, will be most affected by the greenback fl ood.

While the Chinese Government has been addressing the problem since the second half of this year, harsher measures were launched in November to clamp down on hot money.

On November 9, the State Administration of Foreign Exchange (SAFE), the foreign exchange watchdog, issued a notice on strengthening foreign exchange administration and preventing hot money influxes by standardizing trade, foreign direct investment, return investment and overseas public offerings. The notice required banks and other financial institutions, which bear the full brunt of hot money, to strictly manage their position in sales and exchange settlements.SAFE will also closely watch the short-term debt quota and the banks’ outstanding guarantee for foreign institutions and monitor domestic companies’ overseas initial public offerings (IPO) to ensure that money raised from overseas markets is used for standard economic practices, such as trade and business transactions. The exchange watchdog will enhance management on domestic institutions and personnel who set up specialpurpose overseas companies and will punish illegal activities.

Later, on November 15, the Ministry of Housing and Urban-Rural Development and SAFE issued a notice on managing housing purchases by overseas institutions and individuals. Yao Jian, spokesman of the Ministry of Commerce, said the ministry has been keeping a close eye on foreign investment in the domestic property market.

On November 29, the Shanghai Futures Exchange raised the transaction deposit for copper, aluminum and zinc futures from 5 percent to 10 percent, that for wire rod, gold and deformed steel bars from 7 percent to 12 percent, and that for natural rubber futures from 11 percent to 13 percent. Those measures increased the cost of transaction and curbed speculation to some extent.

Stricter controls

Although some SAFE officials do not believe there’s large-scale hot money fl owing into China, the government will not relax its supervision. Moreover, the current international capital flow does not allow emerging markets, like China, much leeway to function when facing hot money.

On November 30, SAFE fi gures showed the surplus of bank sales and settlement of foreign exchange in October reached $57.6 billion, double that of September. The sales of exchange in October also broke an annual high with $125.3 billion.

Wen Bin, a senior researcher at the International Financial Research Institute of Bank of China, said the spiraling surplus of sales and settlements of foreign exchange was closely related to hot money.

TARGETING FOOD: Zhengzhou Grain Futures Exchange(pictured) is the biggest exchange of its kind in China. Recently,grains and other agricultural products become major targets of speculation for hot money

A country’s difference in sales and settlements of foreign exchange should roughly re fl ect the difference in its imports and exports, Wen said. However, China’s trade surplus in October was $27.1 billion, less than half of the surplus of sales and settlements of foreign exchange in the banks. The huge gap proves the existence of hot money in the Chinese market.

Figures released by the People’s Bank of China on November 26 showed the newly added foreign exchange reached $77.6 billion in October, the highest in 30 months.But the country’s trade surplus was only$27.15 billion, and foreign direct investment was $7.66 billion. Using simple math, analysts wonder where the extra $42.79 billion came from.

Also, since the third quarter of this year,the in fl ow of foreign capital has risen signi ficantly, from $25.71 billion in July to $43.55 billion in August.

A combination of attacks

Sun Lijian, Deputy Dean of the School of Economics at Fudan University, said the government needs to focus on two major methods in curbing the negative effects of hot money: cut off from the source and explore investment tools for the hot money.

Sun said relevant government departments should combine their efforts to combat hot money and suggested departments such as the Ministry of Commerce and SAFE impose the Tobin tax, applicable to financial sector participants to reduce short-term currency speculation, in markets that are mostly coveted by hot money. The government should constantly combat speculative activities in the commodity market to relieve people’s worries about in fl ation and currency appreciation.

As for the second method, Sun said the government could set up an “international board” in the stock market speci fi cally dedicated to hot money and overseas investors.This would make it easier to monitor and supervise the movements of speculative money.

At a forum on financial and strategic emerging industries held in Beijing on December 1, Gu Shengzu, a member of the Standing Committee of the National People’s Congress and a renowned economist, suggested developing new industries by taking advantage of speculative money.

Gu said the hot money in the Chinese market is in excess, but is seriously unbalanced, as most is clustered in stock, property and agricultural product markets. An urgent task at present is to lead the hot money to invest in the real economy.