PRC Crackdown on Hot Money: RMB Reval Imminent?

♠ Posted by Emmanuel in , at 3/26/2010 12:02:00 AM
I almost forgot to post this one. Basically, you'd expect more inflows of "hot money" into China when speculators believe the revaluation of the Chinese renminbi will occur soon. Do the yuan traffickers know something we don't--perhaps some insider information about the timing of a revaluation to, say, appease America prior to the 15 April Treasury decision? Also factor in those wanting to take advantage of asset price rises in China as well as somewhat higher interest rates in the developing world. Once more, the currency watchdog, the rather amusingly titled State Administration of Foreign Exchange (SAFE), is conducting sweeps for illegally entering hot money. From our favourite official publication bar none, China Daily:
The State Administration of Foreign Exchange (SAFE) will conduct a special investigation in 13 provinces and municipalities during the first half of this year to examine whether international "hot money" was flowing into China under the cover of trade, foreign direct investment (FDI) and foreign debt, the Shanghai Securities Journal reported Tuesday.

China faces an increasing risk of net inflow of foreign exchange in the backdrop of a more complex and volatile international balance-of-payments situation in 2010, SAFE said at its annual meeting on foreign exchange in Beijing on Monday. There are more uncertainties in cross-border money flows this year, SAFE noted. The investigation will focus on trade in goods and services, individuals, FDI, international payment transactions and cross-border money flows, and will cover major channels, projects and entities through which international speculative money comes into China, the regulator said.

SAFE vowed to punish violators of foreign exchange law and regulations as well as to avoid adverse effects on normal trade and investment activities during the crackdown. Amid stronger market expectation of a yuan appreciation, the cases of illegal use of foreign exchange have been on the rise in recent months, according to the Shanghai Securities Journal.

Lu Zhengwei, chief economist with Industrial Bank, told the Beijing News that the increasing inflow of foreign exchange was mainly due to potential lucrative returns coveted by international speculative money under current conditions. He attributed China's attractiveness to four factors: the country's quick recovery from the world financial crisis compared with Western countries; strong market expectations of a yuan appreciation; low interest rates adopted by world major economies; and a surge in assets prices in emerging economies including China.

However, Lu also warned of a possible massive exodus of international money within the year as some institutional investors were already considering withdrawing from emerging markets. Whether massive pullouts would become a reality depends on when the US Federal Reserve raises interest rates, he said.
Is a crackdown a prelude to revaluation? It's certainly food for thought.