Chinese exporters should brace themselves for a steady rise in the value of the yuan while the steep hiking of asset prices looks set to continue, say analysts studying the movements of "hot money."
Although the value of the yuan, China's currency, has hovered at around 6.83 to the US dollar for the past several months, analysts say the rush of international short-term speculative funds has already begun with China's economy showing signs of improvement.
The country saw a massive exodus of hot money because of the global financial crisis in the fourth quarter of last year and the first quarter of this year, said Zhang Ming, an economist with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.
From the second quarter, the situation reversed with an influx of hot money, he said.
No official figures concerning hot money have been released, but analysts have compiled a scratchy picture from the unusual coincidence of China's increasing foreign exchange reserves and declining trade surplus and reduced expenditure of foreign investment in China.
Zhang estimated the amount of hot money inflow at $88 billion from the second quarter.
Analysts normally calculate hot money by deducting foreign direct investment and a trade surplus from the country's foreign exchange reserve increase.
"The shrinking trade surplus and expanding forex reserves in the third quarter this year indicate hot money influx is rising again," said Sun Mingchun, chief China economist of Nomura Securities.
"The inflow will not only put further appreciation pressure on the currency, but also create more liquidity and fuel inflation of the country's asset prices," he said.
"With a large hot money inflow, China will have no choice but to let the yuan appreciate or to create more liquidity in order to maintain a stable foreign exchange rate," said Zhuang Jian, a senior economist with the Asian Development Bank.
Once the yuan appreciated, profit margins of China's exporters, already suffering from falling orders, would be further squeezed as their products would become more expensive and less competitive, Zhuang said.
Hot money flows into China through multiple channels, including falsified international trade with over-invoiced exports and underground private banks.
Zhang said hot money would continue flowing into China this year and in the first half of 2010 as the attractions remained: strong liquidity, soaring asset prices, increasing anticipation of yuan appreciation and recovery of the US economy.