"China has a strict control over the capital account, thus making it costlier for hot money to enter the country than other emerging markets," Zhang said.

In terms of the current account, Zhang said domestic foreign trade companies could bring in hot money by reporting low import quotations and high export quotations or registering sales revenue received in advance and deferred payments. Some foreign trade dealers have forged fake trade documents, enabling them to collect payment although no goods have been exported, he said. He added that fake trade has been the most convenient channel for hot money to enter the country.

Zhang cited a case in Guangdong Province where an importer signed a contract with a domestic foreign trade dealer to pay him three months in advance in U.S. dollars. Three months after the contract was signed, the Chinese dealer asked the foreign side to postpone the payment date for another three months. After the next three months passed, the Chinese dealer required the importer to raise the price of the goods because of the price surge of raw materials. After two months of negotiations, they cancelled the contract, and the Chinese side was fined 10 percent of the money it had received in advance.

In this dispute, the two companies manipulated international trade conventions by successfully keeping the importer's money in China for eight months. The Chinese dealer could use the money he received in advance to invest in the mainland capital and property markets. Therefore, in addition to the currency appreciation during the eight months, the importer got 10-percent investment revenue from the Chinese side.

Hot money also can enter China through underground money banks, Zhang said. Such banks have not been authorized by the government, are not subject to government regulations and handle deposits and loans illegally.

In these cases, foreigners usually deposit money in an overseas account at a Chinese underground bank. After changing the dollars into renminbi, the banks deduct relevant trading fees and then deposit the money into the renminbi account of the foreigners, he said.

How to contain hot money?

The frequent inflow and outflow of hot money would undoubtedly cause economic uncertainties in the mainland markets, said Zhao Qingming of China Construction Bank.

"The excessive influx of hot money will expand market liquidity, cause excessive money supply, and will eventually push up inflation," he said. "The hot money inflow also poses more pressure for renminbi appreciation. It can also create bubbles in the property and stock markets."

The large amount of hot money also has negative impact on currency policy, Zhao said.

Mei Xinyu of the Chinese Academy of International Trade and Economic Cooperation agrees. "Worse still, if the money is pulled out of China all of a sudden, the normal operation of mainland financial system will be disrupted," he said.

As a means of containing hot money, Zhao suggested that the government "reasonably control the renminbi appreciation expectation, strengthen efforts in trade investigation and sanctions and maintain asset prices at a reasonable level."

The State Administration of Foreign Exchange (SAFE) should cooperate with the Customs agency to crack down on fake trades, Zhang said. He also suggested keeping the China-U.S. interest rate difference at a reasonable level to curb arbitrage.

SAFE had stated earlier that it would strictly control foreign exchange collections and settlements, tighten its supervision and investigations of commodity and service trades, strengthen the management of the bank's short-term foreign debt quotas and improve foreign-invested companies' management of foreign debt. It also vowed to strengthen its efforts in checking cross-border capital flows and cracking down on underground banks and illegal foreign exchange trades.

Worries of a pullout

Mei warned of the financial uncertainties of a sudden pullout of hot money.

"The outflow of hot money could bring enormous disaster to the domestic financial system," he said.

Mei said the risk would come from two factors-the U.S. subprime crisis contagion and a perception that mainland renminbi appreciation and capital market gains had reached a peak. Should this happen, hot money would "quickly get the arbitrage and pull out," he said.

Mei also said the U.S. subprime mortgage crisis is worsening. If foreign-invested companies and foreign institutional investors wanted to cover losses in their home countries, they would sell off their assets in China and switch the capital into their home countries to fuel the liquidity-hungry economies, he said.

"If that happens, the renminbi will be forced to drop sharply," Mei said.

Collective irrational actions are common in financial markets, Mei said. In the long run, he believes the renminbi will keep appreciating. But if some speculators expect a downward trend in the currency's value, they would quickly retreat, prompting an overall fear of renminbi depreciation, which would in turn stir other speculators who may follow suit, he said.

"That is the scary part," Mei said. He suggested that China reject a fast and substantial appreciation of the renminbi and keep its appreciation speed at a slow and incremental level.