Economy

China faces 'strong pressure' from capital inflows

(Xinhua)
Updated: 2010-10-15 13:55

BEIJING - China is facing "strong pressure" from capital inflows in the near term, and the country should continue to improve the yuan exchange rate mechanism to prevent "hot money" speculation, the country's foreign exchange regulator said in Beijing on Thursday.

Large increases in the country's foreign exchange reserves in the third quarter has given rise to concerns of speculative "hot money" inflows, which experts believe was triggered by the prospect of a stronger yuan.

China's central bank announced Wednesday that China's foreign exchange reserves grew by $194 billion in the third quarter to $2.6483 trillion by the end of September, up 16.5 percent year on year.

The State Administration of Foreign Exchange (SAFE) said in a statement on its website that foreign capital inflows had been prompted, due to China's stable economic performance and expectations of the yuan appreciating.

"Hot money" inflows could have worsen the domestic inflation level and asset bubbles, complicating China's monetary policy making, it said.

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However, it was "unscientific" to equate expansion in foreign exchange reserves with rising "hot money" inflows, the SAFE said.

The regulator attributed the hefty rise in foreign exchange reserves in the third quarter to the appreciation of non-dollar currencies against the US dollar, especially when the euro rose 11 percent against the dollar in the period.

This has increased the value of China's non-dollar assets, and in turn added more than $80 billion to China's foreign exchange reserves, the SAFE said.

The huge rise in foreign exchange reserves had also resulted from China's growing trade surplus and the overseas listing of large domestic firms in the past three months, including the initial public offering of the Agricultural Bank of China, which raised more than $10 billion in Hong Kong in July, it said.

The Chinese government should adopt more comprehensive measures against possible "hot money" inflows in the long term, with enhanced monitoring and further improvement on the yuan exchange rate formation mechanism, it said.