International Hot Money in A Dilemma in China
2004-12-8 10:57:45

According to a report in the China Business News, Chinese Premier Wen Jiabao said when he arrived in Laos on November 28 to attend the ASEAN 10+3 Summit that China wouldn't loose the exchange rate between Renminbi and US dollars despite of pressure from other countries. So far this has been the most emphatic speech by a senior Chinese leader on the declining exchange rate of US dollars.

Just as China's official data show that hot money of 100 billion US dollars came into China to speculate on the appreciation of Renminbi in the first half of this year, most economists indicate that China can sustain the inflow of much more capital than that it's handling now and the awkward situation that China is defeated by international hot money is far from a reality.

As a matter of fact, international hot money is are in a dilemma and can do nothing in China now.

In light of analysis by relevant experts with the Financial Research Institute under the Chinese Academy of Social Sciences, international hot money usually enter a country ceaselessly and get exchanged into its currency when it attacks the currency. If the financial authorities of the country want to keep the current exchange rate, they have to put a lot of its currency into circulationí¬just as the Hong Kong Monetary Authority did to buy US dollars recently. That will increase the supply of the currency objectively and lead to inflation in the country eventually. As such is the case, the financial authorities of that country have to select either excessive inflation or change of its exchange rate policy. Hot money has at least a 50 percent chance of winning.

As there are not enough derivative instruments in China, international speculators cannot make much money only by doing spot transactions in the foreign exchange market even if Renminbi appreciates. According to Steven Green, an economist with the Standard Chartered Bank, if various factors in China cause the exchange rate between the US dollar and Renminbi to fluctuate to the extent of a three percent rise or drop in 2005 and change to 1 dollar against 8.03 yuan at the end of the year, the yield will be less than that on three-year American treasury bonds, which is 3.242 percent.

But speculative hot money is usually exchanged into various financial products in a capital market. A study by the Swiss Bank holds that the purpose of such hot money is to speculate on the appreciation of Renminbi and, besides Renminbi deposits, they are investing in highly fluid stocks and bonds. Because such hot money only makes short-term investments, the top priority for them is high fluidity.

A researcher with Guotai Junan Securities also noted that such speculative international hot money is unlikely to be invested in industries as it is directed at the price difference when Renminbi appreciates. Thus, the financial securities that can be cashed easily and have a very high fluidity are its best choice.

The rise in the stock markets in China's Taiwan and Japan brought about by the appreciation of their currencies presents a good example for China. If overseas hot money comes into the stock market in China, it will surely change the structure of funds in the market. International hot money never launches a market and only takes advantage of an opportunity; it will either pour oil on the flames or hit a person when he is down. However, as there isn't the mechanism of short sale in China's stock market, whether these funds will enter the market depends on whether China's stock market can go out of the slump.

But it's more and more difficult for China's stock and bond markets to stand for a long time the unfavorable influence brought by the preemptive monetary deflation policy of the central bank. The ceaseless decline and stagnation of the stock market make it more and more difficult for enterprises to raise funds by issuing stocks and the yield on subscriptions for new stocks is becoming lower and lower. Hence insiders are generally of the opinion that hot money will not enter the stock market of Mainland China for lack of confidence in it.

There is a rumor in the market that some international hedge funds are poised to sell short the more fluctuating A shares in the stock markets in Shenzhen and Shanghai through QFIIs (qualified foreign institutional investors). It is understood that the Chinese regulatory department has warned some QFIIs against their intentional short sale of A shares.

Another round of clamor for the appreciation of Renminbi will soon fade away. 


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