Hot Money Comes Back!

The international hot money which took a leave away from China during financial crisis is coming back. They bet on the recovery of Chinese economy.

Various data of foreign exchange reserve, the RMB counterpart of foreign exchange reserve and qualified financial institutional investor (QFII) indicated that the international hot money is accelerating in getting back into China. Meanwhile, the Chinese watchdog is ceaselessly increasing the level of monitoring.

The experts said that great importance should be attached to the hot money which will increase the prices in the capital market, squeeze the private investment and aggravate the national economic unbalance.

Pay Attention to Hot Money

One year ago, the experts in China were worried about the possibility that the international hot money might collectively withdrew from the Chinese market. Now, they have to worry about the potential threat of the coming-back hot money.

The data from the People’s Bank of China, or the central bank, showed that in the third quarter of 2009 China saw an increase of 61.8 billion US dollars in its foreign exchange reserve, of which 41 billion US dollars can not be attributed to the favorable balance of current account and the foreign direct investment. The experts thought the most of unexplainable increasing part is due to the hot money.

Another important index of foreign exchange the RMB counterpart of foreign exchange reserve revealed its data in September, which was 398.523 billion yuan (USD 58.35 billion). Compared with the data in July and August, this index saw a great increase, foreshowing the drastic increase of foreign capital entering into China.

In addition, the QFIIs, which are always a vane for the international money, greatly increased their shareholding proportion in finance and real estate in China, as shown in the Q3 financial reports of listed companies in China. In October the State Administration of Foreign Exchange (SAFE) increased the upper limit for a single QFII’s investment amount from 800 million US dollars to 1 billion US dollars.

As the QFIIs increased their investments into the Chinese A-share market (the yuan-denominated stock market), the international hot money rendezvoused in Hong Kong. Therefore, the Hong Kong Monetary Authority consecutively injected 4.65 billion HK dollars, 5.81 billion HK dollars and 6.2 billion HK dollars into the Hong Kong banking system, increasing the banking balance to the historical high 306.378 billion HK dollars on November 16.

Apart from substantial data, the reports about the illegal private banks’ paving the way for the entry of hot money in Guangdong can be seen frequently. The same case happened in 2007 when the international hot money flooded into China. A lot of foreign capital entered into the Chinese market with the Chinese domestic entity enterprises as the carriers.

Betting on Better Economy

“The main reason to explain the hot money’s swarming into China is the expectation for RMB’s appreciation,” said Li Zhongmin, an economic expert from the Chinese Academy of Social Sciences.

The RMB non-deliverable forward (NDF) is usually used to measure the expectation of the overseas market for the RMB’s appreciation. On November 13, the NDF closed at 6.627, implying that the overseas market hoped for a 3.03% increase of the RMB’s value.

Meanwhile, the Chinese B-share market which is denominated by the US dollar and HK dollar continuously increased in November. It was another signal of the expectation for the appreciation of RMB.

“Apart from the expectation for RMB’s appreciation, the Chinese economy, which is on the way of recovery, brought the capital market upward. It is another reason to attract the hot money,” Zhuang Jian, chief economist of Asian Development Bank.

According to the statistics of American fund research institute EPER, the emerging markets attracted 50 billion US dollars in 2009. China, India, Russia and Brazil have seen net capital inflow in the stock funding.

Chen Zhimin, investment director of Efunds, believed that China’s economic recovery will follow a V-shape pattern. The global political and economic situation is changing. The international hot money will flow into the market in different ways, pushing the A share prices to a higher level.

Zhang Ming, another expert from the Chinese Academy of Social Sciences said that the trend of international hot money’s flowing into China will be continued in the first half of 2010.

Standard Chartered lowered the expectation for China’s CPI and prime interest rate in 2010. According to its report, the Chinese central bank was forecasted to increase the prime interest rate by 27 benchmark points in the first quarter of 2010 and the same thing will happen in the following quarter. It was undoubtedly another “cardiac” for the hot money’s inflow.

Higher Level of Monitoring

In order to deal with the international hot money, the Chinese economic watchdog heightened the level of monitoring for this phenomenon.

On November 11, the Chinese central bank published the Report of Monetary Policy Implementation in the Third Quarter in which the central bank for the first time put forward the idea of “consummating the RMB’s exchange rate forming system combined with the flow of international capital and changes of main currencies’ value”.

Tan Yaling, head of China Foreign Exchange Institute, said that the new idea showed the importance attached to the international hot money from the financial decision-makers. The Chinese government will think more of the capital speculation to enhance the control of the risks and to keep the financial security.

In addition, the Second Monetary Policy Department of the People’s Bank of China was founded on November 4. This new department will focus on “improving the reform plans of the RMB’s exchange rate forming system, stipulating the exchange rate measures, monitoring the changes of exchange rate in the global financial market and studying the flow of international capital”. This also proved that the Chinese government has attached more importance to the exchange rate problems against the complicated international monetary situation.

According to source, the SAFE will exert stricter supervision and administration over the hot money’s entry into China via corporate exchange settlement accounts.

In Li Zhongmin’s opinion, people should worry about the unreasonable increase of the A share market pushed by the inflow of the hot money because the stock market is likely to be back to the 6000 mark after suffering a big blow in 2008. What is notable is that the private sector in China, which didn’t receive much support from the banks and government, may be confronted with the possibility that their financing space will be squeezed by the hot money. This can aggravate the unbalance of the Chinese economic structure.