July data shows obvious outflow of hot money

(Xinhua)
Updated: 2008-08-14 13:57

BEIJING - Chinese mainland banks received US$5.6 billion in foreign exchange deposits in July, compared with US$11.9 billion the month previous, according to the People's Bank of China data released on Wednesday.

Liu Yuhui, head of the Chinese economy evaluation center under the Chinese Academy of Social Sciences, said on Thursday forex deposits were less than the US$8.336 billion foreign direct investment (FDI) actually used nationwide and the US$25.28 billion trade surplus in July. The gap and the monthly decline pointed to an obvious outflow of short-term speculative funds, or hot money, he noted.

The outflow was partly due to the strengthening US dollar over the past couple weeks, he added.

"Large amounts of capital have been flowing back to the United States because of the stronger dollar. The process began at the beginning of the year in India and the Republic of Korea, but in June and July in China."

The short-term upward adjustment of the dollar resulted partly from the downward movement of crude oil prices on international markets over the past few weeks, said Zhao Xijun, deputy head of the research institute of finance and securities under the Renmin University in Beijing.

China has been on high alert against a quick outflow of hot money in quantity in a short period, something which will affect the country's economy adversely.

In a related development, central bank data showed the outstanding amount of broad money supply, or M2, which covers cash in circulation plus all deposits, stood at 4.46 trillion yuan (US$650.1 billion) through July, a growth of 16.35 percent over the same period last year. The outstanding amount of narrow money supply, or M1, which covers cash in circulation plus corporate current deposits, was 1.55 trillion yuan, up 13.96 percent.

The growth rates for M2 and M1 were 0.39 percentage points and 7.09 percentage points, respectively, lower than the 2007 year-end level.

The slowdown indicated the ongoing tightening monetary policy added to pressure on enterprises in funds, Liu believed.

But Cao Honghui of the research institute of finance under the Chinese Academy of Social Sciences said the effective control on money supply growth was conducive to curbing inflation in a continuous way.

Through July, the outstanding amount of savings deposits was 4.553 trillion yuan nationwide, up 18.79 percent year-on-year. The savings deposits have kept increasing since the beginning of this year, said Li Huiyong, a macro-economic analyst with Shenyin-Wanguo Securities, who estimated the growth in such accounts at about 16 percent for July, up 1.3 percentage points from June.

Li attributed the quicker capital flow to savings accounts to shrinking returns on investment in stocks and real estate.