2010-11-10 09:23

Foreign exchange body moves amid inflation, bubble fears

BEIJING - China's foreign exchange regulator pledged on Tuesday to take measures to crack down on "hot money" inflows amid concerns over inflation and asset-bubble risks.

New rules, raising the amount foreign exchange banks are required to hold overnight, were issued by the State Administration of Foreign Exchange (SAFE).

The regulator said in a statement that it will strictly manage quotas for the use of short-term foreign debt by financial institutions and prevent banks from exceeding them.

The SAFE will also strengthen its supervision over inbound capital by overseas investors and fund repatriation by Chinese companies listed overseas, according to the statement.

The announcement came amid widespread criticism of the US Federal Reserve's decision to introduce a new round of quantitative easing through its purchase of $600 billion of government bonds to stimulate the country's sluggish economy.

The move has raised concerns among emerging economies about speculative capital flooding their markets which could spur stock, currency and property bubbles.

Dai Xianglong, China's pension fund chief and former central bank governor, expressed concern about the negative impact of the quantitative easing at a financial forum in Beijing on Tuesday, saying that it would push up global commodity prices, weaken the dollar and increase the value of other currencies.

Dai urged the US to keep its currency stable and proposed setting a trading range for the dollar.

Economists have warned about China's huge money supply and the inflows of foreign speculative capital, which could lead to higher inflation and place significant pressure on its currency.

In response, Ma Delun, a deputy governor of the central bank, said that policymakers in Beijing will not leave inflation unchecked.

The central bank on Tuesday raised the yield on one-year bills sold in its regular open market by more than five basis points, raising market expectations of more interest rate rises.

The National Development and Reform Commission, the country's top economic planning agency, warned that excessive liquidity worldwide was pushing up commodity prices and full-year inflation may be "slightly" higher than the government's 3 percent target.

Economists forecast that the Consumer Price Index (CPI), a main gauge of inflation, will rise more than 4 percent in October from a year earlier, the biggest gain in two years. The National Bureau of Statistics will announce the exact figure on Thursday.

"In China, we expect CPI inflation to climb to 4.1 percent year-on-year in October from 3.6 percent in September," Robert Subbaraman, a Hong Kong-based economist at Nomura Securities, wrote in a research note.

"We see higher CPI inflation and asset price reflation in 2011-2012 as the main upside risk to the economy, which may force policymakers to tighten aggressively again next year," he wrote.