Hot money floods China

By Cong Mu

The Hong Kong Monetary Authority (HKMA) on Thursday morning injected HK$3.875 billion ($500 million) into the money market to stem an appreciating Hong Kong dollar and keep it within its fixed trading band.

This follows an injection by the Hong Kong central bank of HK$43.8 billion ($5.7 billion) into the market last week, a record weekly high in 2009.

Hong Kong serves as a bridge for hot money, which aims to flow into the mainland on appreciation expectations of the yuan, because the Chinese government maintains a relatively loose control on the capital inflow from the region, said Sam Huang, analyst at the London-based China Economics Policy Research Centre (CEPRC).

The Hong Kong dollar hit the top of its trading band at 7.7500 on Thursday morning as money poured into the territory, partly attracted by initial public offerings on the stock market.

For the year-to-date, the Hang Seng Index has risen 57.38 percent to close at 22643.16 points on Thursday.

The Hong Kong dollar is pegged at 7.80 to the US dollar, but can trade between 7.75 and 7.85. Under the linked exchange rate mechanism, the HKMA is obliged to intervene in the market to keep the trading band intact if the currency hits 7.75 or 7.85.

A survey by Bank of America Merrill Lynch Global Research of a total of 218 fund managers, managing collectively $534 billion, showed that demand for assets that protect against inflation has increased, the bank said in a press release on Thursday.

More than three quarters of the panel of experts expects that the US Federal Reserve will hold off from raising interest rates until the second half of 2010 or even later, Merrill said.

"Investors see inflation as a greater risk than deflation and are hedging that risk with overweight positions in emerging markets and commodities," said Michael Hartnett, chief global equity strategist at Merrill Lynch.

One of the emerging markets that investors are running to is the Chinese mainland, which saw its foreign exchange purchase position in October reach 18.8 trillion yuan ($2.8 trillion), up 14.6 percent from a year ago, according to the People's Bank of China (PBC).

Although there is no official data available on hot money inflow, one of the rough measures is the difference between the position and the combination of trade surplus and foreign direct investment.

The figure in October was $2.4 billion, considerably lower than $38.8 billion recorded in September, mainly because the monthly increase in the funds used by financial institutions to buy up the foreign exchange flowed into the country dropped to 228.6 billion yuan ($33.5 billion) in October from 406.8 billion yuan ($59.6 billion) in September, according to the PBC.

The government has taken effective measures, such as strengthening the monitoring of the use of FDIs, to tighten capital inflow control, so the hot money inflow decreased, Huang of CEPRC said.

Some other economists do not believe the single month drop in the funds means an overall decrease in speculative activities by foreign investors.

As the trade surplus rebounds and the economy recovers, foreign exchange purchases will continue to rise for a long time, said Zhuang Jian, of the Asian Development Bank.

The government should allow the value of the yuan to rise to prevent speculative money from further seeping into the mainland on appreciation expectations and to hedge against imported inflation risks as commodity prices are expected to go up, said Chen Xinhua, director of the finance department at Shanghai University.

The yuan appreciation will also help the restructuring of the economy by removing polluting and inefficient industries, Chen said.

But the government maintains its stance on the currency.

"Keeping the yuan stable at the current stage would benefit counter-crisis efforts and also the world's financial stability," Vice Foreign Minister He Yafei said at a briefing Tuesday.

Agencies contributed to this story

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