Metalnewsnet 17 May ：

China Daily quoted its foreign exchange regulator said China is facing increasing pressure from capital inflows due to increasing foreign direct investment and capital brought in by commercial banks.

A senior economist from the Chinese Academy of Social Sciences argued that such capital inflows are not necessarily hot money as many people have suspected instead most of them are the result of rising demand from domestic enterprises for foreign currencies.

The State Administration of Foreign Exchange said China capital and financial account surplus in the first quarter of this year reached USD 55 billion. This was the first time the regulator released quarterly figures on the country balance of international payments.

A SAFE official who declined to be named said "Pressure from net capital inflows is increasing. But we can't say large capital inflows are definitely hot money. The main reason is that there was a big increase in foreign direct investment into China while China's overseas investments declined."

The SAFE official said money sent back by commercial banks from overseas was another major reason. Commercial banks repatriated a net USD 15.3 billion compared with an outflow of USD 1 billion a year earlier. The official said that the money is mainly used as foreign currency loans to domestic borrowers.

Mr Zhang Bin a researcher with the Institute of Finance and Banking at the CASS said the inflows are the result of capital holders aiming to profit from the interest rate gap between China and the United States and the expected yuan appreciation.

He said that "Those capital inflows may not necessarily be hot money as defined by many people. Our research and surveys show that many domestic enterprises have borrowed dollars to either gain from the interest rate gap or hedge against foreign exchange risks."

He also said that there could be some speculative capital inflows from international speculators, but the amount should be very small. It's hard for such money to flow in given China's capital account control.

The US Federal Reserve has kept the interest rate low at almost zero while China one year benchmark bank savings rate is 2.25%. Meanwhile, the market expects the yuan to appreciate within this year as pressure from the US is mounting while Chinese policymakers have promised to continue to make it more flexible in accordance with the country economic conditions.

( from China Daily)