Following the troubling trail of hot money

By Lin Jianyang  |   2008-7-3  |     NEWSPAPER EDITION

CHINA has taken aggressive measures to blunt the impact of so-called "hot money," amid the explosive growth of its foreign exchange reserves.

According to the State Administration of Foreign Exchange (SAFE), as of the end of May, forex reserves stood at US$1.797 trillion.

During the first five months of 2008, forex reserves increased by 18.7 percent year-on-year, or US$268.7 billion, SAFE figures showed.

Where is all that money coming from, and where is it going?

What caught the attention of analysts was that forex reserves jumped at the same time as the current-account surplus and foreign direct investment (FDI) into the fixed-asset field declined year-on-year.

Jiang Zheng, a macro-economist at a Beijing-based securities firm, has closely tracked these figures and analyzed the data.

Deducting the trade surplus and the FDI, there was an unexplained US$147.9 billion in the forex reserve increase figure, which Jiang and numerous other analysts consider to be "hot money," which is usually defined as short-term global speculative funds moving among financial markets in search of the highest short-term return.

The government doesn't release official figures on this category of funds; in fact, it doesn't even use the term "hot money." So analysts can only make estimates.

Jiang said the "hot money" figures deduced by analysts might even be underestimates. "There is a tricky decline among the FDI figures, ie, the drop of fixed-asset investment," he explained.

"Foreign direct investment in the first five months soared about 55 percent. But strangely, fixed-asset FDI in the first five months fell 3.5 percent from last year's figure," Jiang said. Jiang said it appeared that some speculative money had managed to move into China in the guise of FDI.

US$600 billion

But there are many other channels for "hot money" to flow into China. These include falsified international trade with over-invoiced exports and underground private banks.