Tag Archives: Hot Money

A $2.7 Trillion Plunder of China

More money flowed out of China illicitly over the decade to 2010 than out of the next nine countries together on Global Financial Integrity’s (GFI) newly published list of countries whose wealth is being syphoned off abroad by crime, corruption and tax evasion.

We are talking serious money that is finding its way into offshore tax havens and developed countries’ banks, even allowing for GFI’s conservative tallying of the sums. Total outflows from China in 2001-2010 were $2.7 trillion; the next nine countries collectively, $1.7 trillion, with Mexico the largest individual country with illicit outflows of $476 billion. Over the decade, China’s illicit outflows have accounted for just under half the world total.

China’s average illegal outflows amount to $274 billion a year. Easing of capital controls has, if anything, increased the flow of hot money. By virtue of its enormous economy, though, China has an outflow to GDP ratio that is lower than many developing countries. It is still an enormous theft.

The heavily preferred method of transferring illicit capital is through the corrupt misinvoicing of trade. GFI calculates that the trade misinvoicing is larger than 10% of exports in almost all years. China’s “social, political, and economic order…is not sustainable in the long-run given such massive illicit outflows,” says GFI Lead Economist Dev Kar, one of the authors of the report.  If the new Xi leadership needs reasons for cracking down on corruption, GFI has 2.7 trillion of them.

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Hot Money And Cold Reality

Hot money, fickle by nature, may be turning its back on China. Figures showing that banks were net sellers of foreign currency in October for the first time since May last year suggest just that. They sold 24.9 billion yuan ($3.9 billion) worth in October versus buying 247.3 billion yuan worth in September. Reasons could be various: dollar flight in the face of the euro crisis; cooling property prices; expectations of near-term yuan appreciation evaporating. Be cautious, beyond our usual one month’s figures warning, of taking the numbers as a bearish sign for the economy that might turn the current “fine tuning” of monetary policy into something looser. The central bank says that credit is abundant and inflation remains relatively high.

Footnote: The central bank’s comments came after it broadened its M2 definition of the money supply, effectively bringing in the banks’ off-balance sheet lending, implicitly acknowledging that the old measure underestimated the money supply, and made it an unreliable benchmark of whether monetary policy was being effective.

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China Puts A Number On Hot-Money Inflows, And It’s Small

China’s policymakers have long pointed an accusatory finger at the impact of hot-money inflows on inflation and asset bubbles. To what extent that is true has been difficult to assess. Quantifying such speculative investment inflows is tricky. In essence, analysts look for foreign-exchange reserves not explained by traditional transactions such as trade and foreign direct investment.

The State Administration of Foreign Exchange (SAFE) has taken a stab. The numbers it comes up with are $75.5 billion for 2010, and, after netting out cross-border yuan settlement, $35.5 billion, which is equivalent to 7.6% of the year’s total increase in foreign-exchange reserves. By way of comparison, SAFE reckons, total hot-money inflows in 2009 were $29.1 billion and averaged $25 billion a year over the previous decade, accounting for the equivalent of 9% of annual foreign-exchange reserve increases on average. (The is no netting out number as cross-border yuan settlement is recent.)

The numbers suggest that hot-money inflows account for a relatively small part of capital inflows, and are but a spec compared to the size of the economy as a whole. They took a large leap last year and any extra irritant to inflation is unwelcome to policymakers struggling to drain the excess liquidity from the economy in a controlled and orderly way. They also suggest that China is having increasing difficulty in maintaining effective foreign-exchange controls.

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Beijing Tries To Close Hot Money Loopholes

New rules on individual’s foreign currency transfers have been announced. The State Administration of Foreign Exchange says any person or organization outside China cannot send foreign currency to more than four Chinese individuals on a single day or consecutive days. Receiving foreign exchange from more than four people considered to be near kin. The new rules are intended to close loopholes that let individuals bypass the limit of $20,000 on the amount of foreign exchange residents can buy by using the accounts of relatives and friends. The hope is that it will help cut the flow of hot money coming into the country in pursuit of rising property prices and in expectation of a yuan appreciation. With domestic liquidity already high, the hot money is just helping inflate bubbles. Will the new rules work? This Bystander guesses not. Residents have proved adept when one hot-money loophole closes at opening another.

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Hot Money Stops Flooding Into China

One unintended benefit for the economy from the global financial crisis is that the flow of hot money into China has slowed to a crawl or less.

The latest quarterly figures from the central bank show foreign exchange reserves rising to $1.9 trillion at the end of September, up from $1.8 trillion at the end of June, a rate of increase that is slower than previously and less that what the inflow of foreign exchange from a record $29 billion trade surplus and $9.9 billion in foreign direct investment would suggest, even after adjusting for the dollar’s recent rise. (China’s foreign exchange reserves are denominated in dollars.)

All of which supports the notion that the hot money inflow has stopped. Or even reversed. (China’s secrecy over the composition of its reserves makes it difficult to disambiguate the factors.) The FT quotes Stephen Green of Standard Chartered saying data showed a clear exodus of “unexplained” capital in the last quarter after inflows of $162 billion in the first half.

The yuan has barely budged against the dollar in the past couple of months. That has taken the speculative fervor out of any bet that it would continue its previous rise. The tens of billions of dollars that had flooded in in that hope had officials worried about their potentially destabilizing effect, particularly on efforts to dampen inflation.

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