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Nations should boost cooperation to address hot money: analysts

By  WANG XIAOTIAN  (China Daily)

09:24, March 28, 2013

The excessive liquidity caused by easing policies in major economies such as the United States, Japan and the United Kingdom, is posing great challenges for BRICS nations and they should boost cooperation to address speculative hot money, analysts said.

Ding Zhijie, dean of finance at University of International Business and Economics in Beijing, said that although capital inflows vary from country to country, and some are beneficial for countries that suffered dramatic capital outflows and currency depreciation in 2012, in the long run they're definitely a danger.

"BRICS countries and other emerging economies must stand together for a greater say in the issuance of major reserve currencies," Ding said.

The Fifth BRICS Summit - attended by representatives from Brazil, Russia, India, China and South Africa - kicked off in Durban, South Africa, on Tuesday.

Ding said the spillover effect of the quantitative easing by some countries would make foreign exchange reserves pile up in emerging economies and affect their normal implementation of domestic monetary policies.

"In addition, the foreign capital inflows will get higher returns, in contrast to the very low returns of investing the foreign reserves in the low-risk assets of developed countries, which emerging countries have to do," Ding said.

"This will lead to the deterioration of emerging economies' payment capabilities and add to the risks of a payment crisis."

Yuan positions among Chinese banks accumulated from the sales of foreign exchange to the central bank - an indicator of capital inflows - increased to a record 684 billion yuan ($110 billion) in January, according to central bank data released on March 5.

A possible point of consensus among the five BRICS countries could lie in calling for the exchange rates of major currencies, especially the US dollar, to be kept at a stable level, said Lu Zhengwei, the chief economist of Industrial Bank Co Ltd.

"In addition to confining the currency exchange rates, BRICS members are also very likely to reach a consensus on hot money checks. For example, setting up a unified safety net against international speculative capital inflows and further opening up their domestic financial markets to other member countries."

"We cannot let foreign capital come and go as it pleases. Instead, we should make it stay to avoid short-term impacts on our economies. That's a mutual task for BRICS," said Zheng Xinli, vice-president of the China Center for International Economic Exchanges.

The center forecast that the BRICS countries are expected to account for almost half of the world's output by 2030. Their combined output will rise from 17 percent of global GDP in 2010 to 47 percent in the next 20 years, it said.

Ding added that countries should increase the costs for capital inflows, such as imposing a tax on the inflows, to smooth capital fluctuations.

But Wang Jun, a senior analyst at the China Center for International Economic Exchanges, said BRICS nations shouldn't worry too much over the capital inflows as their economic growth has moderated.

"The recovery of the developed countries will gradually shore up their currencies and attract capital to flow back, if the quantitative easing continues to work," Wang said.

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