PROTECTING PROPERTY: A high-end housing project is under construction in Xiamen, Fujian Province. Restrictions on foreign hot money in the domestic property market will be extended as part of the government crackdown on hot money (LAI JIANQIANG)

On November 30, SAFE figures showed the surplus of bank sales and settlement of foreign exchange in October reached $57.6 billion, double that of September. The sales of exchange in October also broke an annual high with $125.3 billion.

Wen Bin, a senior researcher at the International Financial Research Institute of Bank of China, said the spiraling surplus of sales and settlements of foreign exchange was closely related to hot money.

A country's difference in sales and settlements of foreign exchange should roughly reflect the difference in its imports and exports, Wen said. However, China's trade surplus in October was $27.1 billion, less than half of the surplus of sales and settlements of foreign exchange in the banks. The huge gap proves the existence of hot money in the Chinese market.

Figures released by the People's Bank of China on November 26 showed the newly added foreign exchange reached $77.6 billion in October, the highest in 30 months. But the country's trade surplus was only $27.15 billion, and foreign direct investment was $7.66 billion. Using simple math, analysts wonder where the extra $42.79 billion came from.

Also, since the third quarter of this year, the inflow of foreign capital has risen significantly, from $25.71 billion in July to $43.55 billion in August.

A combination of attacks

Sun Lijian, Deputy Dean of the School of Economics at Fudan University, said the government needs to focus on two major methods in curbing the negative effects of hot money: cut off from the source and explore investment tools for the hot money.

Sun said relevant government departments should combine their efforts to combat hot money and suggested departments such as the Ministry of Commerce and SAFE impose the Tobin tax, applicable to financial sector participants to reduce short-term currency speculation, in markets that are mostly coveted by hot money. The government should constantly combat speculative activities in the commodity market to relieve people's worries about inflation and currency appreciation.

As for the second method, Sun said the government could set up an "international board" in the stock market specifically dedicated to hot money and overseas investors. This would make it easier to monitor and supervise the movements of speculative money.

At a forum on financial and strategic emerging industries held in Beijing on December 1, Gu Shengzu, a member of the Standing Committee of the National People's Congress and a renowned economist, suggested developing new industries by taking advantage of speculative money.

Gu said the hot money in the Chinese market is in excess, but is seriously unbalanced, as most is clustered in stock, property and agricultural product markets. An urgent task at present is to lead the hot money to invest in the real economy.

Why Fight Hot Money?

Hot money, with its speculative and unpredictable nature, is strictly prohibited anywhere in the world. In China, in particular, the hot money exerts negative influences on the successful implementation of the monetary policy. Currently, the asset account is still controlled by the government, so the biggest influence hot money can have in the Chinese market is over the exchange rate. When dealing with a large-scale influx of hot money, the Chinese central bank, in order to keep the renminbi exchange rate stable, must buy into large amounts of foreign exchange, which in turn will increase the supply of the yuan in the domestic market. On the other hand, in order to curb hot money and raise the cost of its entrance into China, the government has to keep the domestic interest rate low.

Hot money will likely result in inflation and affect the balance of international payments and the yuan's stability. It causes huge uncertainties in the foreign exchange market and might also exacerbate the imbalance of international payments, distort exchange rates and even lead to financial crises.

Last but not the least, hot money harms financial and banking stability. Hot money is not effective capital, and its only purpose is to make windfall profits. It will quickly withdraw from a market once it has earned enough money, and this can in effect trigger stock and property market slumps and cause substantial uncertainties in the financial market.