Bloomberg News

China Faces ‘Hot-Money’ Surge on Financial Market Turmoil

September 21, 2011

(Updates with yuan’s fixing rate in fifth paragraph.)

Sept. 21 (Bloomberg) -- Turmoil in global financial markets may be spurring a surge in flows of speculative capital into China as investors bet on the nation’s growth and prospects for gains in the yuan.

Financial institutions’ yuan positions, accumulated from purchases of foreign exchange by the central bank, had a net gain of 376.94 billion yuan ($59 billion) in August, 72 percent more than in July and the biggest increase in five months, central bank data showed today. Economists watch the numbers for signs of inflows of so-called hot money.

Inflows of capital may complicate central bank efforts to tame inflation and limit the risk of asset bubbles in the real- estate market. With lenders’ reserve requirements already at record levels, the People’s Bank of China may rely on selling bills to soak up cash.

“It’s clear money is flowing into China if you consider the global turmoil last month and the low yields available elsewhere,” Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. said in an interview in Beijing today. “Given the liquidity crunch facing small and medium- sized enterprises it would be difficult for the PBOC to raise reserve requirements any further.”

Inflows of money may add pressure for China’s currency to climb and help to suppress money-market rates. The People’s Bank of China set the yuan’s reference rate 0.17 percent stronger at 6.3772 per dollar today, the highest since 2005.

The International Monetary Fund estimates China’s economy will grow 9.5 percent this year.

Stability, Returns

“U.S. Treasuries yield below 2 percent and Europe is facing a crisis, so China offers stability and better returns in addition to the prospect of yuan appreciation,” Shen said.

Banks’ yuan positions rose to 25.26 trillion yuan ($4 trillion) in August from 24.89 trillion in July, according to data on the central bank’s website today.

The PBOC has raised interest rates five times in the past year, boosted banks’ reserve ratios nine times and imposed restrictions on lending to help curb inflation that’s exceeded the government’s 2011 target of 4 percent each month this year. Consumer prices climbed 6.2 percent last month from a year earlier.

The banks’ positions reflect the net result of the purchase and sale of foreign exchange with clients for transactions including trade and foreign investment.

China’s trade surplus last month dropped to $17.8 billion and foreign investment amounted to $8.5 billion.

--Nerys Avery in Beijing. Editors: Paul Panckhurst, Nerys Avery

To contact Bloomberg news staff for this story: Nerys Avery in Beijing at navery2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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