By Ouyang Xiaohong (欧阳晓红)
Issue 619, May 13, 2013
Market, page 20
Translated by Zhu Na
Original article: [Chinese]

Facing the threat of rapid RMB appreciation brought about by hot money inflows from abroad, regulators couldn’t sit still any longer.

On May 5, the State Administration of Foreign Exchange (SAFE) issued new rules that strengthen the management of foreign exchange inflows and monitoring the inflow of money disguised as trade payments.

Then on May 9, the Central Bank put 10 billion yuan’s worth of three-month bills (similar to treasury bonds) up for sale - the first time it’s taken such an action in 17 months – in an attempt to tame the RMB’s appreciation.

Li Youhuan (黎友焕) from Guangdong Social Sciences Centre says SAFE issued the new rules to deter foreign exchange inflows, but in fact, it’s very hard to control hot money.

In the first quarter of 2013, new funds outstanding for foreign exchange reached 1.22 trillion yuan - a historic high. And customs data showed that in the first quarter, China had a foreign trade surplus of 383.46 billion yuan – which far exceeded most analysts’ predictions. This would usually be a great sign for China’s export growth, but many experts have raised doubts about that large surplus.

Shen Jianguang (沈建光), an economist with Mizuho Securities, says that although the customs declaration forms match real import and export activities, some companies repeatedly import and export the same batch of goods in order to move funds into China. 

This can be seen by regional differences in exports. The export increase in March mainly went to Hong Kong and Southeast Asian nations, but exports to developed economies and countries outside Asia were very low. “China’s real export situation is still very grim,” Shen said.

Shen argues this point saying that currently Europe and America are still facing many obstacles in their economic recoveries. Also, orders during the Spring Canton Fair in Guangzhou this year were less than during the same period last year. Furthermore, the year-on-year increase in foreign trade cargo going through ports in March was only in the single digits. Finally, the shipbuilding industry has been hurting badly, reflecting that growth in exports must actually be quite low.

During the first four months of 2013, bilateral trade between mainland China and Hong Kong totaled $150.59 billion - a 66 percent increase year-on-year. Fan Wei (范为), an analyst at Hongyuan Securities, says that the real trade volume should be about $100 billion if you assume 10 percent growth on last year’s $91 billion of trade. The rest is hot money, Fan says.

“The hot money situation is getting kind of serious now,” said Zhao Qingming (赵庆明), a foreign exchange expert. He says trade has always been the main channel for hot money flows, and that the new rules from SAFE aren’t surprising. If the situation continues, China’s foreign exchange reserves will hit a historic high.

The RMB’s value seems to have already separated from the basic economy. The inward flows of hot money due to expectations of RMB appreciation started last quarter and still have no end in sight.

According to Liu Yuhui (刘煜辉), director of the Key Laboratory of Finance at the Chinese Academy of Social Sciences, starting from April 2012, the Central Bank’s strategy had an obvious change. It started to strengthen management of the RMB value in order to guide market expectations. The Central Bank may think remaining passive in regards to currency expectations could lead to an economic bubble burst.

On May 9, the exchange rate of the RMB against the U.S. dollar was 6.1925 yuan, 55 basis points higher than the previous trading day and a new high since foreign exchange reform. Since April, the RMB has appreciated against the dollar 749 basis points, 146 more than during the entire year of 2012.

Shen Jianguang said that RMB appreciation should slow down in the short-term so that enterprises affected by the slumping export situation can have time to restructure. He says that the RMB’s value against dollar shouldn’t appreciate below 6.1 before the end of the year.

HSBC has stated that China’s new rules governing foreign exchange funds management have slowed the appreciation of the RMB against the dollar. It cautions not to rule out the possibility of more hot money prevention measures being launched. 

“In order to prevent hot money, SAFE strengthened management of banks’ foreign exchange loan deposit ratio. This was the first time,” said Liu Dongliang (刘东亮), a senior analyst with China Merchants Bank. He predicts that the move will dampen speculative activities in the market.

However, Liu Yuhui says that the inflow and outflow of money is easily hidden, which makes it very difficult to control.