Regulators must raise guard against hot money inflows

China's commodity and stock markets have turned largely bullish and are attracting a lot of speculative money.

The country's regulators have been paying great attention to the possibility of hot money disrupting the domestic market. Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission, said the monitoring system for cross-border capital flows should be improved to prevent large-scale inflows and outflows of hot money from disturbing emerging markets.

Yi Huiman, chairman of the China Securities Regulatory Commission, had earlier said that China welcomes the normal cross-border flow of capital, but warned against the harmful effects of increased inflow and outflow of hot money.

Foreign investors attach great importance to China's financial market because they remain optimistic about its stability and of Chinese enterprises' profit prospects. After the outbreak of the novel coronavirus, China has been the first major economy to register positive growth thanks to effective epidemic prevention and control.

Many foreign investors remain optimistic about China's development prospects. However, there are also speculative foreign investors and institutions who chase some good stocks in China's A-share market, which, together with the recent expectation of the yuan's appreciation, makes China's financial market attractive.

To prevent the risk of large-scale inflow and outflow of hot money, China must effectively reduce the risk of financial assets. It should steadily promote the reform of the registration system for IPO issuance so that more domestic enterprises issue securities in accordance with market-based principles, and ensure investors have more securities options.

It should also channel more long-term domestic funds into the market, improve the short-selling mechanism, promote the return of stock values, enrich the "toolbox" for investors to avoid risks, and give play to the market's self-correction function.

China also needs to improve the macro-prudential management system and the regulatory framework for systemically important financial institutions, explore macro-prudential management of cross-border capital flows, and deal with macro, counter-cyclical and cross-market risks in a timely manner to prevent various financial risks.