China hits out over ‘hot money’
By Jamil Anderlini in Beijing
Ten international banks, including HSBC and Standard Chartered, have been punished by China’s foreign exchange regulator for breaching strict capital controls by helping to funnel huge amounts of foreign exchange into the country’s soaring stock and property markets.
The banks are among a group of financial institutions revealed to the Financial Times after the State Administration of Foreign Exchange announced 29 banks – 19 of them domestic – had received unspecified punishment for “assisting speculative foreign capital to enter the country disguised as trade or investment”.
A senior regulatory source said other institutions included Citibank, Bank of East Asia and branches of China’s “big five” state-owned commercial banks – China Construction Bank, Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and Bank of Communications.
The money they helped to channel was having a “serious effect on healthy economic development and government efforts to control growth”, Deng Xianhong, SAFE’s deputy director, said in a statement.
None of the Chinese banks reprimanded would comment but Standard Chartered acknowledged it had been audited by SAFE and said it was “making efforts to improve our systems”.
Citibank said it had received no notification on this matter, while HSBC confirmed it was inspected by SAFE in March and April this year and that it was in “constructive discussions with SAFE”. BEA could not be reached for comment.
China’s currency is not easily convertible for purely financial purposes that are not related to trade or direct investment.
Capital inflows into China increased dramatically in the first four months of this year with most of it going into a booming stock market that has risen more than 50 per cent since the start of the year. House prices in China’s 70 largest cities grew 6.4 per cent from a year earlier in May, compared with April’s 5.4 per cent increase.
“There has been a huge turn-around in the overall balance of payments coming from the capital account with ‘hot money’ inflows of around $5bn-$10bn a month,” said Jonathan Anderson, UBS’s chief Asia economist.
This money is made up of short-term speculative capital that flows in and out of currencies and economies and was a key factor in the Asian financial crisis of the late 1990s.
Most large banks in China, both international and domestic, are able to get around the country’s capital controls by taking foreign exchange deposits offshore and lending a corresponding amount in renminbi through their domestic operations, Mr Anderson said.
“There is even a vibrant trade in bringing physical cash across the border from Hong Kong and Macao,” Mr Anderson said.
Once the money is changed into renminbi it is simple to invest it in the country’s booming property or stock market.
