BEIJING, May 19 -- The 2008 China Financial Market Development Report,
issued by the People's Bank of China on May 4, pointed out that various stimulus
packages launched by respective countries would influence supply and demand
relation in international financial market. This may probably lead to a large
scale withdrawal of capital from emerging markets. "If the inflowing offshore
funds in China begin to outflow, it may probably result in a drastic adjustment
in the stock market and bond market of China," said the report.
The warning of the Chinese central bank is based on the financial crises as
it occurred in different countries as well as the appreciation of the US dollar
since the later half of 2008. The dollar value moving up resulted from the
flowback of large sums of money from international markets to the US after
subprime mortgage crisis.
After the financial tsunami broke out in the US in 2008, it is not only the
US financial institutions that brought back the capital invested overseas to
make up the shortage of liquidity but capital in the global market also sought a
safer place--the US market. Therefore, it is no surprise that foreign capital
withdrew from emerging markets considering that capital from other parts of the
world also flowed to the US.
Various recovery measures and economic stimulus packages, which are
announced by the affected countries with the aim of saving a depressed economy,
will also change the trend of capital flows in the international financial
market.
On May 5, State Administration of Foreign Exchange (SAFE) in China solicited opinion from all social sectors on the issue of administration of domestic foreign exchange accounts of foreign institutions. SAFE stated that these accounts of some foreign institutions tend to be a hotbed of illegal practices because of the absence of unified regulations. SAFE will reinforce the management of these accounts in domestic non-offshore banking sectors.
I believe that there are several key points here. First, SAFE will regulate
the opening and operation of foreign institutions' domestic foreign exchange
accounts, in order to keep track of cross-border capital flows. Second, it wants
to prevent these accounts from being used for money laundering. Third, it
intends to prevent the large-scale illegal flow of cross-border capital in these
accounts from adversely impacting China's financial market. Fourth, it wants to
avoid these accounts becoming the main channel for the escape of international
hot money.
In recent years, with the increasing opening up of China, more and more
foreign institutions have opened foreign exchange accounts in domestic banks.
The volume of business keeps increasing rapidly. According to incomplete
statistics, such accounts opened by foreign institutions within China exceeded
100,000 at the end of 2008.
A few years ago, when RMB was appreciating fast and domestic asset prices
increasing in leaps and bounds, a large number of foreign institutions
frequently opened accounts in domestic banks. This made a huge a mount of
international hot money rush into China. The total volume of international hot
money in China at that time was estimated to be $500-600 billion equivalent to 5
trillion yuan. After the financial crisis broke out, due to the reflux of the US
dollar and the depreciation of RMB, the net outflow of the balance of payments
accounts in China is estimated to be between $20 billion to $200 billion in the
fourth quarter of 2008.
The trend of RMB exchange rate and the development of Chinese economy in
the future will determine the direction of international hot money flow.
Considering the fact that China's economy will recover earlier than other
countries, if RMB exchange rate can be kept stable or even allowed to rise
slightly, there is little chance of a massive outflow of international hot money
from China, no matter how turbulent international financial markets are. If the
flow of international hot money can be limited to a controllable range, we don't
need to worry about it too much.
However, if China doesn't accelerate the pace of economic reform for
dealing with key problems, China's economy will face many difficulties when the
US and European economies revive after the crisis. By that time if the RMB is
depreciated because of a slowdown of China's economic growth rate, it is
possible that there would be huge amounts of international hot money outflow
from China.
China should tighten the administration of the cross-border flow of
capital. But it is unnecessary to strictly control the outflow of oversea
capitals. The key to this issue is whether China's economy can keep sustained
and steady growth.
The author is a researcher with the Institute of Finance and Banking under
the Chinese Academy of Social Science
(Source: China Daily)
Posts
No comments:
Post a Comment