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Hot money inflow concerns

By Wang Lan (China Daily)
Updated: 2008-07-07 15:58

Taking into account the interest rate differential and the rate of appreciation against the US dollar, yuan deposits carry an average yield of about 10 percent a year compared to US dollar deposits in the US, analysts figure. What's more, "it is practically risk-free investment", says Zhang Fan, an analyst at Changjiang Securities.

Analysts say more funds previously invested in the stock market had returned to the banking system, resulting in a sharp increase in the money supply in May.

"Money supply growth may have accelerated in May because of a reflow of money into the banking system after the stock market correction," says Wang Qing, chief economist at Morgan Stanley Asia Limited, in a recent report.

Savings deposit growth in May recovered further to 13.7 percent year on year, the highest since December 2006, compared with 10.4 percent in April and 8.8 percent in March, reaching a total of 19.1 trillion yuan ($2.78 trillion).

The yuan has continued to appreciate against the US dollar and in April it crossed the barrier of 7 against dollar. The yuan has appreciated more than 11 percent, from 7.82 at the end of 2006 to the present 6.85, with the most rapid appreciation occurring in the first quarter of 2008.

Zhang Ming, an economist with Institute of World Economics and Politics at Chinese Academy of Social Sciences, estimates in a recent report that the aggregate hot money that flowed into China from 2003 to the first quarter of 2008 could amount to $1.75 trillion, or 104 percent of the total foreign exchange reserves by the end of March.

According to the latest figures from the State Administration of Foreign Exchange, the foreign exchange reserves in the first five months of 2008 totaled $268 billion, up 18.7 percent year on year.

The stock market crash in Vietnam in June triggered further concern about more hot money flowing from Vietnam into the mainland stock market.

But experts and analysts say it is unlikely to happen.

"The scale of the Vietnam stock market is much smaller than the size of Chinese market," says Zhang Xiaojun at CITIC China Securities. "The amount of hot money leaving Vietnam market is quite limited compared with the amount drastic enough to form an impact on Chinese market. There is basically no correlation between the two markets."

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