China's FDI surges but need to track hot funds

By Wang Yanlin  |   2008-7-12  |     NEWSPAPER EDITION

Employees work on the production line at an automobile joint venture in Chongqing. Foreign direct investment in China, the world's fastest-growing major economy, jumped 45.5 percent in the first half. More in photo gallery

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FOREIGN direct investment in China jumped 45.5 percent in the first half of the year from a year earlier to US$52.4 billion, the Ministry of Commerce said yesterday.

The ministry did not release the figure for June alone. But the growth in June should have slowed from previous months given that the FDI expansion from January to May stood at 54.97 percent.

However, analysts said the government has to monitor closely the inflow of speculative capital, or hot money, and implement stricter measures to deal with it.

"One clue of hot money is that although China's trade surplus has started to decrease, the foreign exchange reserves are still growing rapidly which means capital may enter in the guise of FDI," said Li Maoyu, an analyst with Changjiang Securities Co.

Last month, China's trade surplus fell 20.6 percent from a year earlier to US$21.3 billion. It was the third straight month for the surplus to drop from a year earlier.

But China's foreign exchange reserves had jumped to US$1.8 trillion by May, with an average increase of US$53.7 billion each month through May. Last year's monthly average increase was US$38 billion.

There was no official calculation of how large a pool of hot money is in the system. But industrial analysts had estimated at least US$147.9 billion of hot money had flowed into the country in the first five months and it pushed the number to as much as US$600 billion in total.

"The government should take more measures to control the inflow of hot money which could fan inflation and hurt the economy," said Li.

The yuan has risen 6.88 percent versus the US dollar this year and 21 percent since the fixed exchange rate was scrapped in July 2005.

Last month, the Chinese government said it would enhance cross-border capital flow management by strengthening efforts to ensure forex transactions were based on real trade activities.

Three government departments, including the State Administration of Foreign Exchange, the Ministry of Commerce and the General Administration of Customs, would link internal electronic systems from next Monday to check forex receipts and export settlements.

Last year, China's FDI advanced 13.6 percent to US$74.8 billion.