Speculative capital inflows, or "hot money," hit $80 billion in the first quarter, equal to two-thirds of the inflow for all of last year, Zhu Baoliang, vice president of State Information Center, a research institution under the National Development and Reform Commission, said.
The official Shanghai Securities News quoted Zhu as saying: "More than $80 billion in hot money came into China in the first quarter, compared to the total hot money inflow for the whole of 2007 of around $120 billion and an average monthly amount of $10 billion (last year). So this year's hot money volume is three times last year's," Zhu was quoted as saying.
The inflows in the first quarter have increased market liquidity, which in turn could put further upward pressure on inflation, he warned.
Because of this, the Chinese government must be cautious in allowing faster yuan appreciation, he said. While faster currency appreciation will help ease domestic inflation by dampening the price of imports, it will also cause higher hot money inflows speculating on the currency's rise.
"Allowing the yuan to appreciate rapidly in a short period of time and then holding it stable would be very useful to restrain hot money," said Zhu, arguing that the opportunity for using yuan appreciation to fight inflation will exist in China only in the first half of this year.
Zhu and many other economists believe that the domestic inflation rate will begin to ease from mid-year as increased supply helps ease food prices and favourable base effects enter year-over-year calculations.
Zhu also advised the government to maintain its current tight monetary policy, keeping M2 year-on-year growth at around 16 percent and holding new loan growth to 3.9 trillion yuan this year. This will stabilize inflation expectations and prevent supply shock inflation from turning into a long-term rise in general inflation.
Zhu predicted that consumer prices will begin to ease in the second half year, though the inflation rate will average 6 percent in 2008, well above the government's 4.8 percent target.
The nominal year-on-year growth rate of total fixed-asset investment will be around 25 percent this year, about the same as in 2007, while GDP growth this year will remain above 10 percent, though below 2007's upwardly revised rate of 11.9 percent.