China warned of sudden retreat of hot money

By Ding Qi (
Updated: 2008-03-18 16:30

A huge amount of speculative capital has poured into China over the past few years, and its sudden retreat could wreak financial havoc, warned a research report from an unnamed authoritative institution in China.

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Hot money influx may speed up

The report, acquired by 21st Century Business Herald, said that over US$460 billion worth of speculative money from overseas poured into China last year. The figure is four times larger than that of 2006 or twice the total from 2002 to 2006.

At the end of last year, China's foreign reserves totaled US$1.53 trillion, up US$461.9 billion over the end of 2006. According to the report, there is a large part of speculative money entering China via fake trade and non-trade channels.

The changing foreign exchange rate between the yuan and the US dollar, the China-US interest rate gap, and a potential US economic recession are three major reasons behind the huge capital influx, it said.

However, there are possibilities that this huge amount of funds may simultaneously leave China in a very short period of time, after gains are taken from property and stock investments in China. In that case, that whole country might face situations like the Southeast Asian financial crisis in the 1990s, the report warned.

Subprime effect

Admittedly, the US sub prime crisis could drive some funds out of America to promising economies like China. However, as the crisis has continued to worsen in the past months, there could be a change in the capital flow.

According to statistics in the report, more than half of 14 major banks in the US and Europe would be in deficit for the first quarter of this year. In order to cover the huge losses and maintain normal operations, these institutions are in great need of new capital. As an emergency measure, they may draw back investment in China through various hedge funds.

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