China Warns ‘Hot Money’ Inflows Possible on Easing From Abroad

China’s foreign-exchange regulator renewed concerns that the nation will see fresh speculative inflows of money after the U.S. and Japanese central banks said they would pump more funds into their financial systems.

“The policies in major economies of monetary easing and low interest rates will boost global liquidity, increase risk preferences in the market and drive speculative funds into China,” the State Administration of Foreign Exchange said in a statement on its website today. A large amount of so-called “hot money” inflows is possible, “but there are many uncertain factors,” SAFE said.

The SAFE statement didn’t name the U.S. or Japan, which over the past two months expanded asset-purchase programs and maintained near-zero interest rates designed to stoke growth. Capital inflows and an economic rebound in China could fuel inflation and asset bubbles after former central bank adviser Fan Gang said this week that overheating risks may resurface this year.

“Concerns of a hard landing in China are gone and so are yuan depreciation expectations,” said Xie Dongming, a China economist at Oversea-Chinese Banking Corp. in Singapore. “At the same time, hot money inflows can’t be very large as China’s property market is virtually closed to foreign money.”

The concerns echo Chinese statements following the U.S. Federal Reserve’s November 2010 decision to start a second round of large-scale asset purchases. China at the time stepped up efforts to curb inflows, and People’s Bank of Governor Zhou Xiaochuan said that loose policies in developed economies may spark the movement of cash into the nation.

Rising Yuan

SAFE said foreign-exchange investors are betting on the yuan to rise further. The currency strengthened 1 percent last year against the dollar, the least in three years.

The PBOC set today’s daily yuan exchange-rate fixing at the lowest level since Jan. 9, spurring speculation that China is seeking to cap gains as a slide in the yen makes Japanese exports more competitive. The currency weakened less than 0.1 percent to 6.2202 per dollar as of 12:35 p.m. in Shanghai.

The yen’s 9 percent fall against the dollar in the last two months, the most among 16 major currencies tracked by Bloomberg, has caused friction with trading partners and highlighted the risk of retaliatory action as the Group of 20 prepares to meet next month.

Forces working against hot-money inflows including China’s focus on boosting domestic demand and encouraging companies to invest abroad, “which will further contribute to balanced trade and investment,” SAFE said. The agency also cited a weak global economy, an evolving sovereign-debt crisis and geopolitical conflicts, “which may lead to big swings in China’s cross-border capital flows.”

Economists at banks including Credit Agricole CIB and Daiwa Capital Markets are expecting the PBOC to increase benchmark interest rates in the second half, according to a Bloomberg News survey this month.

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