Increase in China's Reserves Raises Financial Security Concerns

Country wants to stop the flow of 'hot money.'

Beijing has vowed to tighten management of cross-border capital as its financial reserves soar, indicating the flow of so-called "hot money" is speeding up, state media reported June 24.

China's foreign exchange regulator threatened again to crack down on outside speculators who are betting on the short-term appreciation of stocks, property and the yuan in the hopes of reaping quick returns. Such short-term speculative funds are considered highly destabilizing to a nation's economy. "We need to prevent speculative funds from entering the country through channels such as (being disguised as) trade," Hu Xiaolian, the director of the State Administration of Foreign Exchange, was quoted as saying by the Financial News.

China's financial security faces growing challenges from energy price hikes, the global economic slowdown, and international financial market volatility, Hu said. The country's foreign exchange reserves rose to $1.76 trillion at the end of April, state media reported earlier this month. The reserves, by far the largest in the world, expanded by an additional $74.5 billion in April -- the equivalent of about $100 million every hour.

The increase was roughly three times larger than the trade surplus and the value of foreign direct investment -- the two traditional sources of reserve growth. This led analysts to conclude that perhaps as much as $50 billion had entered the economy in the form of "hot money". Authorities have warned previously about the need to monitor capital inflows and crackdown on fraudulent export transactions, which disguise the movement of speculative funds.

Copyright Agence France-Presse, 2008

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