China is witnessing a hot money rush, which is a speculation fund to gain profits from the continuing low exchange rate of the dollar and revaluation of the Chinese yuan. Instead of direct investment in stock market or companies, the fund is taking advantages through buying local currency - currency revaluation of the local government - exchanging the revaluated currency with the dollar. Knowing this, the Chinese government has repeatedly warned against speculation activities, but has not been quite successful due to the lack of effective countermeasures.
Influx of Tens of Billions of Dollars of Speculation Fund
Quoting an unofficial conference minute of the Chinese finance authority, Wall Street Journal, in its Internet edition, analyzed that the influx of speculation fund is now close to its critical point, posing a threat to the peg to the dollar, China`s fixed exchange rate system to the dollar. The document also said that Chinese officials expressed concerns over the fact that more than $70 billion of speculation fund has streamed into China through a black market in the first half of this year alone, and the amount is likely to increase in the second half.
As of late September, the Chinese foreign reserve is $514.5 billion, 27.6 percent up from $403.2 billion dollars in the December of last year. Now, Chinas foreign reserve is the second largest in the world following Japan.
The international finance world has deemed that as the instability of the international finance market grows recently, funds from tax havens such as the Cayman Islands and Virgin Islands are flowing into China as well.
Huge Amount of Yuan Exchange Must Clarify Its Use
The Chinese government is on the move to monitor the route of speculation fund so as to reduce damages by the exchange rate speculation. First of all, the government is preparing related regulations that will enable the finance authority to access the detailed information regarding the use of the short-term foreign investment fund -- who, how long and how. Along with that, the government plans to step up the monitoring procedure on the foreign exchange market. In particular, companies of foreign capital must clearly prove the use of the exchanged yuan, in cases where the amount of foreign exchange is over $200 thousand.
The State Administration of Foreign Exchange (SAFE) of China recently announced home at abroad that it would soon take strong actions in order to crack down on speculation funds.
Scale of the Dollar Dumping
Continuing weakness of the dollar leads to the Chinese selling dollars. People trying to exchange dollars with yuan formed a long line in front of bank buildings in Beijing and Shanghai on November 19.
Not only that, employees from foreign companies, who have received their payment in dollars, are now requesting their payment in yuan. A black market in Shanghai is flooded with orders to exchange dollars with yuan. Some individuals who are rich enough to exchange $300 thousand with yuan are trying to sell dollars in a relatively low price, said a dollar trader in the black market.
Experts estimated that in the context of profit-oriented nature of hot money, the rush of the speculation fund into China is expected to continue for a while.