China's regulators seek to curb hot money

The rising signs of hot money inflows into China have started to ring alarm bells for Chinese regulators. They are making a fresh effort to curb the flux, which could otherwise harm the health of China's economy.

In its latest monetary policy report, the People's Bank of China attributes the capital inflows to the monetary easing policies of major central banks around the world, and warns that the hot money is challenging financial regulation. Experts say capital inflows pose a threat to China's economy.

"The fast growing capital influx disrupts China's efforts to regulate the financial sector, as it could go into under-regulated sectors, while leaving money-hungry industries with limited support. Secondly, the massive amount of capital drives up the yuan's value. That leaves little room for monetary tightening in the case of high inflation, as it could bring more capital influx. All this creates a vicious circle," Lian Ping, chief economist of Bank of Communications, said.

Regulators are now stepping up their efforts, taking their aim at hot money. In May, the State Administration of Foreign Exchange, China's top forex regulator, issued a set of measures to build a firewall against such threats. In the meantime, the PBOC demanded commercial banks to conduct a self-examination on their foreign trade related businesses.

"We are now reviewing our business services nationwide. Companies are required to declare their foreign trade dealings this years. The reviews mainly aim at trade financing denominated in foreign currencies, especially the US dollar," Ju Xiaojin, senior trader of Bank of China, Financial Mkt Dept. said.

However, experts point out that the measures cannot fundamentally curb hot money inflows. They say the issue needs to be solved with more market based reforms in the area of interest rate, forex rate and the yuan's convertibility.