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Commentary: Hot money needs cooling

By Shi Jianxun (China Daily)

08:21, November 22, 2012

Mainland and HK monetary authorities must make joint efforts to reduce risks from inflows of speculative capital

A series of monetary easing measures by the United States and some European countries since August, aimed at curbing their debt crises and stimulating economic growth, has added huge liquidity to the international financial market and complicated the economic and financial environment facing emerging countries.

A recent Citigroup report indicates that the flow of global capital from developed countries to emerging markets has accelerated following the adoption of the third round of quantitative easing by the US Federal Reserve. More than 80 percent of it flowed to the Hong Kong Special Administrative Region and the Chinese mainland from late September to the end of October. Besides preying on the yuan's exchange traded fund, Hong Kong H shares and yuan-denominated financial products are also the targets for international hot money.

Given that the US dollar is expected to maintain a near-zero interest rate for a long time to come, a large portion of China-bound capital is seeking to profit from the interest rate gap between the yuan and the dollar. The multi-channel entry of hot money makes it difficult for the mainland's monetary authorities to exert effective control over it. But a continuous inrush of speculative international capital, if not effectively curbed, will push up China's inflation, add pressures to the yuan's appreciation, produce serious negative influences on the country's financial stability, and weaken its efforts to tame inflation and pursue sustainable and healthy development of the national economy.

Despite an emerging economic recovery, Asian economies are still likely to face inflation pressures next year under the influence of this huge external liquidity. Indonesia and the Philippines are expected to join Singapore in fighting inflation.

To reduce the risks arising from the inflows of hot money, joint efforts are needed from Asian governments to strengthen monitoring to fend off the excessive inflows of speculative international capital. In response to the large-scale inflows of international hot money to their capital markets, the Hong Kong Monetary Authority and the monetary authorities in the Republic of Korea and Thailand started taking some forcible precautions in October, which have helped avoid further inflation of their asset bubbles.

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