LexisNexis(TM) Academic - Document
LexisNexis(TM) Academic - Document
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
April 28, 2005 Thursday
London Edition 1
SECTION: ASIA-PACIFIC; Pg. 13
LENGTH: 685 words
HEADLINE: Talk of revaluation attracts 'hot money': Speculation on the renminbi has added to pressure for a realignment of China's currency, report Mure Dickie and Richard McGregor
BYLINE: By MURE DICKIE and RICHARD MCGREGOR
BODY:
When it came to speculating on the renminbi, China's capital controls looked more like a challenge than a barrier to Mr Hu, an enterprising entrepreneur from the eastern city of Wenzhou.
Using his permanent residency in France, Mr Hu set up an offshore company to buy property from a real estate business he established in China, says Mei Xinyu, an expert on currency controls at the Chinese Academy of International Trade and Economic Co-operation.
The property did not actually exist. But the paper trail allowed Mr Hu to apply to bring Euros 284,000 (Dollars 369,000, Pounds 193,000) into China. "The contracts were completely in accordance with the law, absolutely faultless," says Mr Mei, whose institution is controlled by China's Ministry of Commerce.
The Wenzhou entrepreneur - who was unmasked last month by regulators - offers an example of the efforts that individuals and companies have been making to move funds into the renminbi amid widespread speculation that Beijing is moving towards a significant revaluation.
Dubbed "hot money" and "floating capital" in Chinese, such transfers exploit holes in the country's closed but leaky capital account.
The transfers, which are propelled by expectations of an adjustment to the renminbi's decade-old peg to the US dollar, have themselves become an added source of pressure for revaluation.
Capital inflows, aside from foreign direct investment, have accounted for nearly half of China's huge reserve accumulation since 2003, according to a paper prepared for the Bank of International Settlements.
Mr Mei says the inflows complicate monetary policy and raise fears about economic overheating and asset price bubbles. "This issue relates to our overall economic stability, so it's a very big problem," he says.
Small-scale Wenzhou businessmen are hardly the biggest culprits. The fastest growing source of foreign exchange for China in 2004 was so-called "credit transactions" - offshore US dollar borrowings by Chinese companies that were converted to renminbi on the mainland.
Nicholas Lardy, a China scholar with the Institute for International Economics in Washington, says the main driver for such offshore borrowing - at a time when Chinese banks are flush with cash to lend - is the expectation of a windfall from a revaluation. "I think it is Chinese entities borrowing dollars and converting it into renminbi and hoping to be able to repay it later at a more favourable date," he said.
Mr Lardy says 2004 net foreign debt inflows - new borrowings minus repayments and interests payments - soared 360 per cent year-on-year.
For some, the borrowings are an unwelcome reminder of the 1997 Asian financial crisis that crippled numerous countries in the region. High levels of short-term foreign borrowings in countries such as South Korea, Thailand and Indonesia helped trigger a sell-off by foreign investors of their currencies leading to a cycle of depreciation and ballooning debt.
China's closed capital account still offers some protection and, for now at least, its currency is under pressure to rise rather than fall.
"Of course, it has a whiff of 1997 about it," says Jonathan Anderson of UBS in Hong Kong, but he adds that current currency flows are not large compared with the size of China's economy or Beijing's Dollars 659bn in foreign exchange reserves.
Mr Anderson notes that recent capital inflows have been motivated by the potential for better investment returns in China and by lower interest rates in the US. The inflows are not "hot money" according to the definition usually used in western financial markets.
"This is not George Soros and big hedge funds," he says.
"It is not money that is likely to back out if there is a trigger."
Indeed, some analysts argue much of the capital being moved into China that is seen as speculative is merely a rational attempt to hedge by individuals and companies.
A researcher at a government regulator says such transfers make it harder for Beijing to push exchange system reform but officials should not fret too much about the issue, especially as rising US interest rates are likely to ease the flow.
LOAD-DATE: April 27, 2005
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
April 28, 2005 Thursday
London Edition 1
SECTION: ASIA-PACIFIC; Pg. 13
LENGTH: 685 words
HEADLINE: Talk of revaluation attracts 'hot money': Speculation on the renminbi has added to pressure for a realignment of China's currency, report Mure Dickie and Richard McGregor
BYLINE: By MURE DICKIE and RICHARD MCGREGOR
BODY:
When it came to speculating on the renminbi, China's capital controls looked more like a challenge than a barrier to Mr Hu, an enterprising entrepreneur from the eastern city of Wenzhou.
Using his permanent residency in France, Mr Hu set up an offshore company to buy property from a real estate business he established in China, says Mei Xinyu, an expert on currency controls at the Chinese Academy of International Trade and Economic Co-operation.
The property did not actually exist. But the paper trail allowed Mr Hu to apply to bring Euros 284,000 (Dollars 369,000, Pounds 193,000) into China. "The contracts were completely in accordance with the law, absolutely faultless," says Mr Mei, whose institution is controlled by China's Ministry of Commerce.
The Wenzhou entrepreneur - who was unmasked last month by regulators - offers an example of the efforts that individuals and companies have been making to move funds into the renminbi amid widespread speculation that Beijing is moving towards a significant revaluation.
Dubbed "hot money" and "floating capital" in Chinese, such transfers exploit holes in the country's closed but leaky capital account.
The transfers, which are propelled by expectations of an adjustment to the renminbi's decade-old peg to the US dollar, have themselves become an added source of pressure for revaluation.
Capital inflows, aside from foreign direct investment, have accounted for nearly half of China's huge reserve accumulation since 2003, according to a paper prepared for the Bank of International Settlements.
Mr Mei says the inflows complicate monetary policy and raise fears about economic overheating and asset price bubbles. "This issue relates to our overall economic stability, so it's a very big problem," he says.
Small-scale Wenzhou businessmen are hardly the biggest culprits. The fastest growing source of foreign exchange for China in 2004 was so-called "credit transactions" - offshore US dollar borrowings by Chinese companies that were converted to renminbi on the mainland.
Nicholas Lardy, a China scholar with the Institute for International Economics in Washington, says the main driver for such offshore borrowing - at a time when Chinese banks are flush with cash to lend - is the expectation of a windfall from a revaluation. "I think it is Chinese entities borrowing dollars and converting it into renminbi and hoping to be able to repay it later at a more favourable date," he said.
Mr Lardy says 2004 net foreign debt inflows - new borrowings minus repayments and interests payments - soared 360 per cent year-on-year.
For some, the borrowings are an unwelcome reminder of the 1997 Asian financial crisis that crippled numerous countries in the region. High levels of short-term foreign borrowings in countries such as South Korea, Thailand and Indonesia helped trigger a sell-off by foreign investors of their currencies leading to a cycle of depreciation and ballooning debt.
China's closed capital account still offers some protection and, for now at least, its currency is under pressure to rise rather than fall.
"Of course, it has a whiff of 1997 about it," says Jonathan Anderson of UBS in Hong Kong, but he adds that current currency flows are not large compared with the size of China's economy or Beijing's Dollars 659bn in foreign exchange reserves.
Mr Anderson notes that recent capital inflows have been motivated by the potential for better investment returns in China and by lower interest rates in the US. The inflows are not "hot money" according to the definition usually used in western financial markets.
"This is not George Soros and big hedge funds," he says.
"It is not money that is likely to back out if there is a trigger."
Indeed, some analysts argue much of the capital being moved into China that is seen as speculative is merely a rational attempt to hedge by individuals and companies.
A researcher at a government regulator says such transfers make it harder for Beijing to push exchange system reform but officials should not fret too much about the issue, especially as rising US interest rates are likely to ease the flow.
LOAD-DATE: April 27, 2005
posted by Eastlaw at 4:55 AM
0 Comments:
Post a Comment
<< Home