IN the continuing clampdown on the inflow of hot money, China's State Administration of Exchange Control (SAEC) is to tighten controls on overseas borrowing by enterprises. Lured by China's high interest rates, some enterprises with strong overseas links are reportedly taking advantage of loopholes in existing laws to borrow hard currencies. The loans are then converted into short-term yuan deposits, lent out at higher rates or used by the companies to finance their activities. Some enterprises have even set up foreign currency funds in Hong Kong promising investors risk-free returns of five to 15 per cent for three months to three years. External borrowing by enterprises must now be sanctioned by the SAEC, but analysts said some enterprises had apparently been able to circumvent the rules to get loans from overseas financial institutions. 'We do not rule out the fact that the hot money could come from enterprises borrowing abroad without our prior approval. We are looking at ways to tighten such inflows from foreign borrowing,' said Lu Nanping, the SAEC's director-general for policy and regulation. Mr Lu said the SAEC would ask state banks to exercise stricter checks on foreign exchange settlements by enterprises to ensure that hard currency transactions were legitimate. 'We are now trying to compile figures to find out the extent of the hot money inflow,' Mr Lu said. 'The high interest rates and stable yuan make it attractive for foreign capital to flow into China, but I can't say when the trend began and I don't think it is that serious.' Because of the credit squeeze, Chinese and foreign-funded enterprises have generally found it hard to borrow and a grey market has emerged where enterprises with spare cash can lend to cash-strapped companies. The cost of lending in these markets can be as high as the country's inflation rate of 24.2 per cent last year. Because Chinese state enterprises are required to turn over their hard currencies to state-designated banks in return for yuan from last January, those which borrow hard currencies could thus easily convert their loans into the local currency. Some analysts said the inflow of hot money was also a reason for the dramatic rise in the country's reserves to US$50 billion last year. It was publicly acknowledged by SAEC director Zhu Xiaohua about 10 days ago, when he said the central authorities were revising laws governing money flows. Hong Kong analysts said cross-border lending had been quite active, suggesting that hot money came mainly from sources within the territory. 'Given the high cost of borrowing in China and the central government's commitment to a stable yuan, there is little to lose from borrowing abroad in terms of exchange risk,' said W I Carr economist Gilbert Choy. He said that given the interest rate differences between the two sides, it was probably worthwhile for those enterprises regarded as prime borrowers to borrow in Hong Kong rather than in China.