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Emerging economies 'should guard against hot money'

By Wei Tian in Beijing and Ding Qingfen in Boao, Hainan | China Daily | Updated: 2013-04-09 05:48

China and other emerging economies should guard against possible financial turmoil caused by policy decisions being made in developed countries, a senior finance official said on Monday.

Dangers include imported inflation as a result of excessive liquidity amid quantitative easing measures, and burst asset bubbles once those policies are withdrawn, according to assistant Finance Minister Zheng Xiaosong.

"We should improve the relevance and flexibility of macroeconomic policies to properly manage hot money flows, and take measures to ensure the stability of overall pricing levels," Zheng said on the sidelines of the Boao Forum for Asia.

He said, "We have to intensify regional cooperation, and establish a sound supervision mechanism, allowing us better knowledge of the short-term capital flow to avoid financial instability caused by fast-in, and fast-out hot money."

Since 2012, major developed economies have begun a new round of QE to boost growth and stabilize financial markets, but Zheng said the effectiveness of such measures has been declining.

The US Federal Reserve, for instance, has linked its easing policies to cutting the country's unemployment rate to 6.5 percent, while Japan said it would not halt its capital injection until inflation reaches two percent.

"Noticeably, this round of QE doesn't come with a scale or time limit," Zheng said, adding that the measures are unlikely to be withdrawn short term.

"Although easing policies have played a role in stabilizing the financial markets, over the long-term, excessive liquidity in the financial markets will inevitably lead to disordered cross-border capital flow.

"Not only will it harm financial market stability and push up commodity prices, it will put more imported inflationary pressures on Asian countries, particularly emerging markets, and may also lead to asset bubbles."

Zheng called on major currency-issuing countries, when formulating their macroeconomic policies, to give more consideration to the negative effects on other countries.

During the latest quarterly meeting of the People's Bank of China, policy makers warned of "uncertainties" in pricing trends, citing capital inflow as one of the major causes.

The central bank's data showed foreign exchange purchase, a key indicator of capital inflow volume, rocketed to its highest ever level of 683.7 billion yuan ($110 billion) in January, against 500 billion yuan recorded throughout 2012.

Experts said such an increase is closely linked to the appreciation of the yuan against US dollar, which has reached its highest level in nearly two decades over the past week.

Liu Dongliang, a markets analyst with China Merchants Securities, said the strong performance of the yuan was a result of improving export data and robust industrial activities, which had ruled out concerns that the economic rebound lacked momentum.

However, Zheng said a bigger concern was that if easing measures were no longer in place, global capital would be pulled from emerging economies, which could lead to asset bubbles bursting, sparking a new financial crisis, "as history has taught us".

Zhang Yuyan, a senior researcher with the Chinese Academy of Social Sciences, said, "QE is not just a potential threat, it may be a very real problem."

Zhang added, "The foreign exchange reserves held by countries like China may suffer value losses, while fluctuations of asset prices and exchange rates may cause a new round of financial protectionism, including more financial regulation."

But Zhao Qingming, an expert on international finance with China Construction Bank, said tougher regulation of cross-border capital flow was necessary for China.

Zhao said regulation could cover two main areas: to protect against illegal cross-border capital inflow, authorities should adopt stricter supervision penalties; while for regular capital inflow from trade and foreign direct investment, the central bank should take comprehensive monetary measures to adjust domestic liquidity, to lessen the impact.

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