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Chinanews, Beijing, Aug 8 - The State Administration of Foreign Exchange (SAFE) recently warned that a large amount of hot money is flowing into China. In checking the foreign currency flow and foreign exchange settlement in ten coastal1 cities and provinces in China, SAFE found that large sums of foreign currency had come into China in the form of foreign trade and investment. Information shows that during the first half of this year, over 100 billion US dollars of hot money flowed into China, a situation that has aroused great concern of the government, the International Finance News reported.
During the first quarter of this year, Chinese foreign exchange reserves increased substantially. During the first three months of the year, Chinese foreign exchange reserves increased by 135.7 billion US dollars. At the same time, China's trade surplus reached only 46.4 billion US dollars and FDI (foreign direct investment) reached only 15.9 billion US dollars. The difference between the two figures reached 73.4 billion US dollars, or over half of the newly increased foreign exchange reserves. Information from the China Customs Office and the Ministry2 of Commerce shows that during the first half of this year, the source location of about 120.9 billion US dollars of foreign exchange couldn't be identified. Analysts3 say the 120.9 billion US dollars of foreign exchange are the hot money flowing into China. As hot money flows to China at a rapid speed, China is put under more pressure to increase its Renminbi basic money supply, which is further worsening the excessive liquidity4 problem. In addition, as hot money always is after short-term gains, the scale of hot money will fluctuate largely. This will seriously affect the central bank’s monetary5 policy. Lastly, the large flow of hot money can usually threaten the financial security of a country. In the financial crisis happening in Mexico in 1994 and the Asian financial crisis in 1997, the abnormal flow of hot money both played an important role. It might be unrealistic to get rid of hot money completely as the problem was caused by excessive liquidity in the international market. In order to solve the problem, the central banks in all countries concerned should work together. At the same time, we should realize that the government's monetary policy to tackle the problem can not take effect overnight. It might take a long time before regulating measures can work, said Mei Xinyu, a researcher at the Foreign Trade and Economics Research Department under the Ministry of Commerce Research Institute.
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