China’s lukewarm money? | FT Alphaville

China’s lukewarm money?

Guan Tao, head of the international payment department of the State Administration of Foreign Exchange, over the weekend stated that stronger capital control were essential to maintaining stability in the Chinese currency and price level, reported the South China Morning Post. ( via China Economic Review)

Guan Tao’s capital control warning came just two just days before China International Capital Corp., one of the country’s biggest investment banking and research houses, said the PRC attracted a total of $48.7bn of so-called `hot money in December — the biggest amount in eight months.

Interestingly, there are other analysts, notably Standard Chartered, who think that hot money inflows have been relatively stable into China in recent months. What’s more, they think the whole hot money `thing’ is happening because of domestic activity, rather than foreign inflows:

The flows which we have identified, shown in Chart 1, suggest that there was no torrent of ‘hot’ money into China in H2-2009. Based on the data we have so far, apparent inflows in 2009 were much smaller than in 2008. The ‘everything else’ category includes speculative flows as well as corporate and workers’ remittances, onshore FX loans being converted into CNY, and trade finance. Since flows in this category are by nature impossible to define (at least before the release of the balance of payments data), we take it as a proxy for ‘hot’ money flows. We believe that the disruption in global trade caused the massive apparent outflow in this category in Q4-2008. And we believe that lending of USD by onshore banks was probably a big part of the ‘everything else’ numbers in 2009. Last year, onshore banks issued USD 136bn worth of USD and other non-CNY loans, compared with only USD 24bn in 2008. Unfortunately for those wanting to borrow dollars, convert them and simply take a long position in CNY, there are rules to prevent people from doing so. But we suspect that some firms still manage to.

Others, particularly importers, borrow USD to pay for goods, rather than buying USD with their CNY, and thus benefit from expected appreciation and from the favorable interest rate differentials onshore. Some of these loans also find their way into deliverable/non-deliverable forwards arbitrage. Despite onshore USD rates moving up, this is still an attractive trade. As a result, we stand by our view that most of China’s ‘hot’ money problem is being generated domestically rather than from outside.

Related links:
China’s baozi economy – FT Alphaville
China: The heat is on – FT Alphaville
Yen benefits from China tightening – FT