Economist: Stable Chinese economy will cool down hot money

14:41, December 02, 2010      

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Facing a flood of hot money, China should maintain its economic and financial situation and avoid systematic financial risks, a senior economist with the central bank suggested.

If China's economic and financial situation remains stable, the influx of hot money will become "cold," Li Daokui, a member of the People's Bank of China's monetary policy committee, said during an interview with People's Daily.

The U.S. Federal Reserve's second round of quantitative easing, or QE2, will inevitably give rise to massive amounts of hot money flowing into emerging economies including China, but may fail to stimulate U.S. recovery, due to the flaws in its financial system, Li predicted.

Averting systematic risks

Li also highlighted the importance of averting systematic financial risks. China currently has more than 10 trillion U.S. dollars of money stock. "If we fail to commit a proper short-term regulation and control, money rushing outward will impact the stability of China's economy."

In the 1980s, global investors were bullish toward Latin American economies at first and there was a glut of hot money on the markets. However, when they suddenly turned their eyes outside those economies, money flooded out and left Latin America in crises. The 1997 Asian Financial Crisis also followed the pattern.

From Savings to stocks

To avoid systematic financial risks, China can start adjusting its loose monetary policies in order to slowdown money stock growth, said Li Daokui.

Meanwhile, China should guide savings deposits out in an orderly fashion and lead savings into capital markets, including the stock markets. This capital can also be invested into global markets, with controllable, orderly and gradual steps, Li added.

By People's Daily Online


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