China's foreign exchange reserves increased 51 per cent last year to a record US$609.9 billion.
What should be a blessing has become a serious headache for the central bank, charged as it is with managing the country's riches. And the headache is becoming more severe as the trade surplus increases with a weak US dollar and the continued strong flow of foreign investment and 'hot' money.
In previous years, the majority of this inflow was direct investment and the surplus in trade and services. But, according to an estimate by Stephen Green, senior economist for global research at Standard Chartered Bank, these two accounted for only about half of the inflow last year, with the rest being non-trade and non-investment capital.
This is what everyone calls 'hot money', some of it betting on a revaluation of the yuan. But this is a slight misnomer in the Chinese context, since a holder of yuan cannot exchange it instantly for US dollars or euros, as he could Hong Kong or Australian dollars, because of the currency controls.
Most of that money has gone into property in the major cities, which investors see as the best and most liquid instrument.
The task of the central bank is to prevent this flood of money from breaking into the domestic system, pumping up the money supply and causing inflation.
