‘Hot money’ make China hold yuan settlement plan

Hot money or called as short-term speculative capital, is a main consideration for economic planners becauase it will lead to quickly rising prices in the sector it targets.

China has been concerned about the possible influx of “hot money” into China’s real estate and stock markets while the United States continues its loose monetary policy. China’s foreign exchange reserves hit a record $2.85 trillion by the end of last year, 18.7 percent up from a year earlier.

Mr.Chen Deming,Minister of Commerce, said that China will take measures to simplify the approval process for new investment earlier this year in Beijing. The ministry source said the ministry began to study the possibility of yuan settlement for FDI in 2010. China’s FDI reached USD105.74 billion,about 17.4% year on year,and the figure have grown 23.4% to USD10.03 billion in January,2010.

Foreign investors believe that settlement in the domestic currency would be more convenient and reduce costs.Currently, foreign companies wishing to invest in China must first get permission from the MOC before winning approval from the State Administration of Foreign Exchange (SAFE) to convert their foreign exchange into the yuan.

But the SAFE announced last Thursday that the “hot money” inflow into China last year was merely $35.5 billion, 7.6 percent of the increase in foreign exchange reserves for 2010.

Some experts welcomed the plan, saying it would assist China in absorbing more foreign investment and quicken the process of yuan internationalization.And some experts said growing speculative capital inflows could make it harder to control inflation, which hit 4.9 percent in January, up from December’s 4.6 percent.

The mnister source also said the ministry needs to discuss it with the central bank before the proposal is finally submitted to the State Council for approval.


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