Overseas investment totalled US$60.72 billion between January and July, suggesting that total FDI this year might break the US$100 billion mark for the first time. Last year's figure was US$74.8 billion.

The sharp increase came despite a slowdown in economic growth to 10.4 per cent in the first half of the year, down from last year's full-year figure of 11.9 per cent.

It also keeps the pressure on Beijing to curb speculative capital hoping to benefit from the appreciation of the yuan. Economists believe this year's inflated FDI figures partly reflect so-called hot money disguising itself as legitimate investment.

Last month the National Development and Reform Commission warned that speculative capital being channelled into fake projects and shell companies threatened to jeopardise the nation's economic growth.

'We have seen a lot of speculative capital from Hong Kong flowing into fixed-income products, but now we may be beginning to see some diversification into other sectors. Some of this may be hiding as trade or FDI,' said Societe General chief Asia economist Glen Maguire.

A report last week by Goldman Sachs predicted that the yuan would appreciate against the US dollar 'almost three times as fast' as traders expect because money flowing into the country was still increasing.

The yuan closed at 6.86 to the US dollar yesterday, up from 7.30 at the start of the year.

Cash inflows from the trade surplus and foreign direct investment suggest reserve accumulation runs at about US$30 billion per month before additional speculative capital, the report said.

The mainland's gigantic US$1.81 trillion of foreign capital has expanded at an average of nearly US$50 billion per month this year, making it difficult for the country's central bank to conduct effective monetary policy while it has to mop so much fresh liquidity.

Last month, the customs department and commercial banks began trials of a nationwide exchange system designed to trace fund flows by requiring exporters to report advance payments for exports and deferred import payments.

The mainland has also tightened checks on foreign investments in an effort to stem the inflow of speculative capital, ordering thorough checks on the authenticity of projects and more stringent approvals for foreign-funded investments.

'July's large investment total may reflect lumpy projects distorting the figures. A number of joint-venture agreements may have been signed in the lead-up to the Olympic Games, such as in the broadcasting or telecommunications sectors,' said Mr Maguire.

Capital flood

Inflated FDI reflects hot money disguising itself as legitimate investment

Between January and July, overseas investment totalled, in US$: $60.7b