The “hot money” war in China
By George Chen
The opinions expressed are the author’s own.
“Hot money” is the hot discussion among Chinese officials, investors and the media these days. The “hotter” the fund flows are, the more risk there is to China’s financial system, many officials believe. Naturally, “hot money” has become a top enemy of the central bank, just like inflation.
Almost the same story took place about five years ago, just ahead of China’s landmark yuan revaluation in July 2005. At the time, we saw media reports about “hot money” every day, but they often disagreed about the amount of “hot money” that China had and could afford.
Some official media preferred to give a vague yuan figure in the tens of billions. I remember a central banker in Guangzhou once disclosed a more specific number and then received an immediate warning from his boss in Beijing. Hot money — how hot? That’s pretty much considered another state secret.
After China’s deputy central bank governor, Ma Delun, helped explain the “pool concept” offered by his boss, Zhou Xiaochuan, to fight an inflow of hot money, other officials joined the chorus. In an article published early this week, Deng Xianhong, deputy chief of the State Administration of Foreign Exchange, urged the government to watch the situation more closely.
China risks becoming a prime target for speculators as developed countries pump cash into the global economy, Deng told China Forex Magazine, an official industry monthly authorized and supervised by the State Administration of Foreign Exchange, Deng’s employer. “If we do not control the property bubble, let a stock bubble inflate and allow the yuan to rise freely, China will face the risk of large-scale cross-border capital flows,” he said.
Beijing may deploy a mixture of policies to deal with hot money flows, Ma explained to the official Shanghai Securities News in a report published on Nov. 15, expanding on an earlier remark by his boss Zhou. “The pool mentioned by Governor Zhou Xiaochuan does not refer to a specific market, but an array of policies,” Ma said.
If you can recall the situation facing China’s financial markets between 2004 and 2005, many officials gave very similar warnings when the whole world had high expectations for Beijing to allow the yuan to appreciate. The so-called hot money rushed into the country, into stocks, property or anything of value, day and night. Inflation was high. Property prices were high. People complained. And what happened? Beijing revalued the yuan.
Property prices rose to a new high. Inflation? Isn’t it the tough living problem that most Chinese still complain about now?
So, what is “hot money” really? According to a definition given by the Financial Times, hot money refers to “money that moves from one currency to another or one asset class to another as investors (including speculators) seek the best possible yields.”
One thing Beijing learned from the yuan revaluation in 2005 is that when fighting hot money, you can’t simply block it but also need to find a way to dredge it, just like dredging your plumbing at home. When sentiment about hot money becomes a crisis, it may not necessarily be a bad thing — after all, nobody wants to see the bubble burst.
George Chen is a Reuters editor and columnist based in Hong Kong.
Photo: A watermelon vendor looks at yuan banknotes at a market in Changzhi, Shanxi province June 21, 2010. REUTERS/Stringer