'Hot money' fear holds yuan settlement plan

By Ding Qingfen and Wang Xiaotian (China Daily)
Updated: 2011-02-22 07:14
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BEIJING - The risk of a surge in "hot money" is one of the reasons why China is unlikely to allow foreign companies to make yuan investments this year, even though a feasibility study was completed last year, said an unnamed source with the Ministry of Commerce (MOC).

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"The ministry looked at permitting foreign enterprises to invest using the yuan last year, but launching the plan will still take quite a long time," an official from the ministry in charge of foreign exchange issues told China Daily on condition of anonymity.

"Hot money", or short-term speculative capital, is a major concern for economic planners as it leads to quickly rising prices in the sector it targets.

Some foreign investors have criticized the domestic investment environment after Jeffrey Immelt, the CEO of General Electric, said last summer that it was getting worse. Government officials have since reiterated the nation's policy of greater interaction with the international community and rejected claims of bias against foreign companies. Officials have cited growing figures for foreign direct investment (FDI).

Minister of Commerce Chen Deming said earlier this year in Beijing that the government will take measures to simplify the approval process for new investment applications.

In response to calls from foreign businesses, the ministry began to study the possibility of yuan settlement for FDI in 2010, said the ministry source.

Foreign investors believe that settlement in the domestic currency would be more convenient and reduce costs.

In 2010, China's FDI reached $105.74 billion, up 17.4 percent year-on-year, and the figure grew by 23.4 percent to $10.03 billion in January.

Currently, foreign companies wishing to invest in China must first get permission from the MOC before winning approval from the State Administration of Foreign Exchange (SAFE) to convert their foreign exchange into the yuan.

But the source said the ministry needs to discuss it with the central bank before the proposal is finally submitted to the State Council for approval.

"I cannot see the possibility that the plan could be implemented soon because this would probably lead to a huge influx of 'hot money' into China," he said.

The government has been concerned about the possible influx of "hot money" into China's real estate and stock markets while the United States continues its loose monetary policy.

China's foreign exchange reserves hit a record $2.85 trillion by the end of last year, 18.7 percent up from a year earlier.

But the SAFE announced last Thursday that the "hot money" inflow into China last year was merely $35.5 billion, 7.6 percent of the increase in foreign exchange reserves for 2010.

"The government has reasons to worry about it ('hot money'), as speculative money would probably flow into China by way of FDI," said E Yongjian, senior researcher at Bank of Communications.

"Nobody can predict the size of the inflow, but we have to be alert."

Experts said growing speculative capital inflows could make it harder to control inflation, which hit 4.9 percent in January, up from December's 4.6 percent.

But some experts welcomed the plan, saying it would assist China in absorbing more foreign investment and quicken the process of yuan internationalization.

"The move would effectively accelerate the internationalization process of the yuan. China could consider allowing foreign companies to invest using the yuan in the near future," said Chen Daofu, policy research chief of the Financial Research Institute at the State Council's Development Research Center.