ICBC warns hot money inflows a 'time bomb'
The huge inflows of hot money speculating on the mainland economy are a time bomb that could devastate the country's financial system, according to a report by Industrial and Commercial Bank of China.
The report, which estimates that more than US$500 billion of the mainland's US$1.81 trillion hoard of foreign cash is speculative, will add to widespread fears that a sudden outflow of foreign capital could put unmanageable stress on the mainland's currency regime.
'The several hundred billion US dollars of hot money [parked in the mainland financial system] is like a time bomb,' the Nanfang Daily newspaper quoted the ICBC report as saying.
'Now that economic conditions at home and abroad have deteriorated, it is possible that hot money could suddenly leave the mainland market. This would have a high chance of causing a huge negative impact.'
Total foreign exchange holdings grew by US$280.6 billion in the first half of the year, far more than the combined total of trade surplus inflows and foreign direct investment, leading many economists to conclude that hot money accounted for the surplus.
Speculative inflows may have been as high as US$180 billion in the first six months, roughly twice last year's full total, according to an estimate by Stone and McCarthy Research Associates.
Aside from pumping up the money supply and helping to stoke inflation, there is widespread concern in Beijing that any sudden outflow of foreign capital could seriously damage the country's still immature banking system.
The central bank this week vowed to step up controls on inflows of foreign capital, while several other government departments recently introduced new inspection measures to prevent hot money masquerading as legitimate inflows.
Some foreign businesses are using apparently legitimate imports of commodities such as oil, soyabeans, copper and iron ore to gain access to domestic currency for investment purposes, according to commodity traders.
The ICBC reports said that investors were targeting the mainland's cheaper asset prices after the recent falls in the property and stock markets, in addition to betting on the appreciation of the yuan.
'China's foreign exchange reserves are definitely sufficient to withstand a rapid assault on the currency. But the consequences of this outflow would probably be seen in the domestic banking system,' said Logan Wright, an analyst at Stone and McCarthy.
The State Council said it would promote the 'stable and healthy' development of the country's capital markets and deepen reform of the financial system.
Such moves would include pushing forward the reform of Agricultural Bank of China, the last of the Big Four state banks to remain unlisted, and China Development Bank, which was in the process of transforming itself from a policy bank into a commercial lender, it said.
