China economist warns hot fund inflows exacerbate inflation

Apr.14, 2008 in Market Outlook

SAN FRANCISCO (MarketWatch) — A Chinese government economist reportedly warned
that China’s efforts to rein in inflation by allowing its yuan to strengthen
could be undermined by inflows of speculative funds, suggesting that the recently
rapid pace of appreciation could slow.

Official first-quarter fund flow data have not yet been released. But Zhu
Baoliang, the chief economic analyst of the prediction department of the State
Information Center, reportedly said that monthly inflows were running at triple
the 2007 levels.

Flows of “hot money” exceeded $80 billion in the first quarter of 2008, compared
with $120 billion U.S. dollars for all of 2007, Zhu told an industry seminar on
Sunday, according to a report from the official Chinese Xinhua news agency.

This trend was exerting pressure on the central bank to increase the money
supply, Zhu said, which could mean further inflation. China’s consumer price
index surged 8.7% year-on-year in February, the last month for which official
figures were available — the biggest rise in nearly a dozen years.

Rapid yuan appreciation might accelerate “hot money” inflows, Zhu was quoted as
saying. He also said that it was not pragmatic to maintain a continued
strengthening of the currency to meet world expectations and suggested that the
exchange rate might stabilize for some time, the Xinhua report said.

“This is what the Chinese have been fearful of,” Marc Chandler, head of currency
strategy at Brown Brothers Harriman, said Monday.

“If you listen to Washington, if the Chinese would just reduce their trade
surplus and import more goods, they wouldn’t have to intervene so much,” but it’s
not that simple, Chandler said.

Data released Friday showed China’s trade surplus shrank more than 10.8% year on
year in the first quarter, as a 28.6% rise in imports outpaced a 21.4% increase
in exports.

Bets on widening spread

The yuan has appreciated more than 4% in 2008 so far, and more than 10% in the
last 12 months.

On a visit to Hong Kong last week, investment guru Jim Rogers called the yuan
“one of the safest investments in the world right now against the U.S. dollar,” a
situation which he said put pressure on Hong Kong to alter its longstanding peg
to the greenback. Read commentary on yuan and Hong Kong dollar peg.

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