Regulators tighten curbs to block hot money

PUBLISHED : Friday, 05 September, 2008, 12:00am
UPDATED : Friday, 05 September, 2008, 12:00am

The mainland's foreign exchange regulator is tightening controls on currency settlements made by foreign-invested companies, the latest attempt to stem a tide of international speculative capital flowing into the country.

The State Administration of Foreign Exchange will extend checks on companies' capital and monitor flows of domestic currency earned from foreign exchange settlements, according to a report in yesterday's Shanghai Security News.

'The regulations are designed to improve foreign-invested firms' management of foreign exchange, facilitate capital verification and settlement of payments, and regulate foreign-exchange designated banks and accounting firms,' the report said, quoting a SAFE official.

The regulations appear designed to prevent foreign-invested firms from inflating their registered capital requirements, one way of converting more foreign exchange into yuan to profit from its appreciation.

Specifically, foreign firms would be barred from using domestic currency gained from currency settlements to invest in the mainland's volatile stock and property markets, the report said.

'This is not a massive conspiracy by foreign companies to bring speculative money into the country but a rational response, mainly using legal channels, to expectations of yuan appreciation,' said Logan Wright of Stone & McCarthy Research Associates.

However, the clampdown on improper currency settlements is the latest attempt to squeeze illegal inflows of so-called hot money that some analysts blame for pumping up domestic liquidity and helping to stoke inflation. Policymakers also fear that a sudden outflow of foreign capital could put unmanageable stress on the mainland's currency regime and seriously damage the still immature banking system.

Despite market speculation that the recent strengthening of the US dollar against the yuan had already caused some speculative capital to leave the country, figures from the central bank that closely track the changes to the official foreign exchange reserve suggest that inflows remain strong. Foreign assets grew 344.06 billion yuan or about US$50 billion in July, similar to the monthly average rise in the foreign exchange reserve in the first half of the year.

The central bank is stepping up controls on foreign capital inflows, while several other government bodies have introduced inspection measures to prevent hot money masquerading as legitimate inflows.

In July, 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.

Beijing has also ordered thorough checks on the authenticity of projects and more stringent approvals for foreign-funded projects.

'The authorities do not have a great read on where the money is coming from and what they can do about it. The new regulations will not make much difference,' said Mr Wright.