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China Says Hot Money Ended Up in Stock, Property

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Asian Business

BEIJING—Most of the speculative and arbitrage capital from overseas that has entered China in recent months has ended up in the equity and property markets, an official at the country's foreign-exchange regulator said in rare comments as the agency usually plays down the effect of hot money inflows into China.

China's property prices have risen steadily over the past year, leading Beijing to introduce a series of tightening measures, including higher minimum down payment requirements and other measures, since April, when prices rose at a record pace. Home prices were up for the 12th straight month in May from a year earlier, though the rate of increase slowed slightly from the previous month. The benchmark Shanghai Composite Index has fallen 28% this year as Beijing has withdrawn the stimulus measures introduced to cushion the effects of the financial crisis.

Workers paint the suspension cables of a main bridge in Guangzhou on Sunday.
.The comments by the State Administration of Foreign Exchange official come after the People's Bank of China loosened the yuan's exchange-rate mechanism on June 19. The Chinese currency had risen 0.81% against the dollar as of Friday.

An investigation that began in February has uncovered 190 cases of hot money inflows involving US$7.35 billion, Deng Xianhong, a vice director at the SAFE, said in an interview published Monday in the state-run People's Daily. The volume of inflows was unchanged from the amount SAFE announced in May.

"A situation of continuous foreign exchange fund inflows forms easily," Mr. Deng said.

"Higher interest rates for the yuan compared to foreign currencies and expectations of yuan appreciation create very strong attractions for overseas capital… The resulting higher domestic stock and property prices and strengthened expectations of a stronger yuan lead to further foreign exchange fund inflows," he said.

Rather than attracting hot money, the yuan exchange rate should be a means of getting rid of inflows of such funds, Mr. Deng said.

"[The yuan exchange rate system] should avoid providing room for continuous arbitrage speculation," he said.

Since it made its exchange-rate policy more flexible last month, the PBOC has been using the dollar-yuan central parity rate to show that it expects the yuan to both rise and fall rather than just rise continuously against the U.S. dollar. The central parity rate is the daily mid-point around which the spot rate is allowed to trade up or down by as much as 0.5%.

The PBOC set the dollar-yuan central parity rate at 6.7733 Monday, up from a record low of 6.7720 Friday, despite the dollar's weakness against the euro following the release of weak U.S. jobs data Friday. Traders said the higher central parity rate shows the central bank wants the yuan to fluctuate and not just move in one direction.

Excessive liquidity and rising inflation in China have pushed money market interest rates higher and will further widen the interest-rate differential between China and the U.S., leading to more capital inflows, Xu Nuojin, vice governor of the PBOC's Guangzhou branch, said in comments published Monday in the central bank-run Financial News.

Mr. Xu didn't elaborate. Officials from the PBOC's local branches can make suggestions, but don't determine policy.



china has been dealing with hot money for a long time....instead of parking it in a bank...property is a good bet!

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