Too hot to handle?
As many in China believe that "hot money", as a major factor in capital flight, was largely responsible for the financial crises in Southeast Asia in 1997 and one that began in Vietnam this year, continued speculative capital inflows had raised strong concern in China.
Mei Xinyu, an economist at the Ministry of Commerce, warned that "hot money" inflows would create problems and put pressure on China's monetary policy.
"Moreover, capital flight will disrupt the normal operation of the country's financial system and have an immense impact on China's financial order," he added.
Zhang Ming, an economist at the Chinese Academy of Social Sciences, echoed Mei's views, saying: "If there was capital flight, it would cause a significant impact on the international payments for China and would probably result in deficits in both the current and capital accounts.
"We should pull out all the stops to contain further inflows of 'hot money', and make full preparations for possible capital flight," Zhang warned.
In addition, analysts said the inflows of speculative money were partly to blame for creating excess liquidity and stoking inflationary pressure in the Chinese economy.
In the first five months of 2008, the CPI, the main gauge of inflation, rose 8.1 percent year-on-year. The CPI for February hit a 12-year high of 8.7 percent.
Amid these concerns, China is taking no chances. Various departments, particularly the PBOC, have stepped up efforts to ward off the risks of "hot money".
The central bank has since last year frequently employed two tools to curb excess liquidity -- raising commercial banks' reserve-requirement ratios (RRR) or issuing bills.
In particular, the central bank has hiked the RRR at an unprecedented frequency.
In 2007, the PBOC raised the ratio 10 times, which lifted it from 9.0 percent last January to 14.5 percent as of December. The central bank had raised the RRR only five times over six years since 2000.
This year, the central bank continued to employ this tool. The latest move was on June 9, when it raised the RRR by 0.5 percentage point (to take effect on June 15) and another 0.5 percentage points (effective on June 25).
The rise on June 25 was the sixth this year, and it brought the ratio to a record 17.5 percent. With it, the central bank said it had received 1.23 trillion yuan in required reserves from the commercial banks so far this year.
Jiang said the amount of the required reserves, along with bill issues, enabled the central bank to successfully ward off the risks created by the excess liquidity owing to "hot money" inflows.
The unprecedented measures taken by the central bank, however, created a dilemma for the Chinese economy: the PBOC was flush with liquidity while commercial banks, equities and the property market faced tight conditions, according to Jiang.