It is roughly estimated that the amount of hot money in China is more than $800 billion. This figure is calculated from the country's total foreign reserve amount minus the trade surplus and foreign direct investment (FDI). The Chinese currency appreciated very quickly last year, when hot money influxes were huge. Of the estimated $800 billion in hot money, $560 billion entered the country in 2007, or three times more than the amount in 2006, according to the government's estimate.

But researchers at CASS believe $800 billion is far less than the actual amount, because the government's estimate does not take into account the hot money that enters through other channels such as underground money exchangers. Zhang Ming said in a CASS report issued on June 24 that the amount of hot money was as high as $1.75 trillion, almost equivalent to the amount of China's foreign reserves. At the end of June, the country's foreign reserves totaled almost $1.8 trillion.

Zhang said hot money flowed into China to take advantage of the renminbi's appreciation in the short term. Since the beginning of this year, the appreciation of the country's currency has picked up steam. In the first quarter, China's trade surplus stood at $41.42 billion, with paid-in FDI at $27.44 billion, and newly added foreign reserves at $153.9 billion. After the country's trade surplus and paid-in FDI amounts were deducted, there was still about $85 billion newly added foreign reserve funds that seemed to come out of nowhere. Still, this calculation did not take into account hot money that entered the country through illegal bank channels.

Zuo Xiaolei, Chief Economist at Galaxy Securities Co. Ltd., believes that emerging markets, and China in particular, are extremely attractive for all kinds of capital, especially financial capital until the U.S. economy stabilizes and the dollar stops depreciating.

Zhang with United Securities said among all the channels through which hot money entered, foreign trade was one of the most important one. For instance, money from fake trades, in which foreign importers deliberately pay more than quoted prices, and surplus funds can be invested in the mainland's capital markets.

Figures from the country's customs show that the volume of exported goods in 2007 grew 110 percent compared to that of 2004, while the relevant trade surplus soared 720 percent during that time.

Sharp increases in the country's trade surplus from 2004 to 2007 indicated that export prices were abnormally high. Most of the time, foreign importers paid prices for goods that were higher than the quoted ones, which allowed foreign capital to sneak into the mainland through seemingly legal means, Zhang said.

Although SAFE estimated that the amount of hot money in the country is not as high as Zhang Ming's calculation, it said that under current market conditions, it was possible that illegal hot money was still seeking significant returns in China. SAFE said coping with the transnational flow of capital was posing huge challenges for overall economic macro-control management.

Safe havens

One possible place where hot money can be found is in mainland commercial banks, where its value can balloon through high interest rates and the renminbi's appreciation against the U.S. dollar, Zhang Ming said. It also can migrate to private funding markets around the coastal areas. Compared to the FDI invested in the production sector, foreign capital flowing in and out of private funding markets is more sensitive. Hot money holders only sign short-term contracts with private enterprises and renew their contracts as long as the private enterprises can make a profit. But if problems occur, they are able to withdraw their capital quickly.

Another possible place for hot money is the capital market. Zhang Ming believes the amount of hot money in the mainland A-share market is