LOVE IT!!!!!
* AUGUST 7, 2009, 3:40 A.M. ET
China's Hot Money Problem Returns
By DAVID ROMAN
Hot money is again flowing into China and that could put Beijing in a quandary.
Should the torrent continue, it could complicate policymakers' efforts to battle inflation. Should it reverse, property and stock prices will be hit hard.
There's no easy solution to this, nor does Beijing have much control over the situation.
As it is the hot money -- speculative inflows that aren't explained by direct investment or trade -- finds its way around China's tight grip on capital flows.
Its return became evident when Beijing reported last month that foreign exchange reserves rose $178 billion -- the most ever -- in the second quarter.
[china money]
Analysts at UOB Group estimate that as much as $83 billion of this could be hot money -- much of that flowing into stock and property markets and contributing to forming bubbles in both.
As a comparison, about $200 billion of the $1 trillion lent out by Chinese banks in the first six months of the year is thought to have wound up in stocks. The Shanghai Composite is up 97% so far this year.
Two factors could keep the funds flowing in: Expectations that Beijing will soon begin to raise interest rates, and a sense that, after being halted for a year, the revaluation of the yuan could resume.
The yuan's revaluation in particular has always been a motivation for hot money investors, given the potential for gains as China allows the currency to strengthen -- and the very low likelihood that the currency will weaken.
The further China moves away from economic crisis, the greater the anticipation that yuan revaluation will continue.
Traders in currency forwards markets are already betting that it'll take 6.78 yuan to buy a dollar a year from now, down from 6.83 currently.
Over the long term, gains could be substantial. The Peterson Institute for International Economics says the yuan is undervalued by between 15% and 25%.
Beijing could discourage the inflows by signaling that it won't live up to these expectations. A change in global sentiment would do the same: As investors retreated around the world in late 2008 and early 2009, some $173 billion of hot money flowed out of China, UOB estimates.
But in that respect hot money is a double-edged sword, pulling down prices on its way out just as it helps create bubbles on the way in.
Write to David Roman at david.roman@dowjones.com
* AUGUST 7, 2009, 3:40 A.M. ET
China's Hot Money Problem Returns
By DAVID ROMAN
Hot money is again flowing into China and that could put Beijing in a quandary.
Should the torrent continue, it could complicate policymakers' efforts to battle inflation. Should it reverse, property and stock prices will be hit hard.
There's no easy solution to this, nor does Beijing have much control over the situation.
As it is the hot money -- speculative inflows that aren't explained by direct investment or trade -- finds its way around China's tight grip on capital flows.
Its return became evident when Beijing reported last month that foreign exchange reserves rose $178 billion -- the most ever -- in the second quarter.
[china money]
Analysts at UOB Group estimate that as much as $83 billion of this could be hot money -- much of that flowing into stock and property markets and contributing to forming bubbles in both.
As a comparison, about $200 billion of the $1 trillion lent out by Chinese banks in the first six months of the year is thought to have wound up in stocks. The Shanghai Composite is up 97% so far this year.
Two factors could keep the funds flowing in: Expectations that Beijing will soon begin to raise interest rates, and a sense that, after being halted for a year, the revaluation of the yuan could resume.
The yuan's revaluation in particular has always been a motivation for hot money investors, given the potential for gains as China allows the currency to strengthen -- and the very low likelihood that the currency will weaken.
The further China moves away from economic crisis, the greater the anticipation that yuan revaluation will continue.
Traders in currency forwards markets are already betting that it'll take 6.78 yuan to buy a dollar a year from now, down from 6.83 currently.
Over the long term, gains could be substantial. The Peterson Institute for International Economics says the yuan is undervalued by between 15% and 25%.
Beijing could discourage the inflows by signaling that it won't live up to these expectations. A change in global sentiment would do the same: As investors retreated around the world in late 2008 and early 2009, some $173 billion of hot money flowed out of China, UOB estimates.
But in that respect hot money is a double-edged sword, pulling down prices on its way out just as it helps create bubbles on the way in.
Write to David Roman at david.roman@dowjones.com