The massive build-up in China’s foreign exchange reserves over the last five years, which are now by far the world’s largest at $2,850 billion, has encouraged many analysts to speculate that large flows of overseas money were evading the country’s strict capital controls and finding their way into the local property and stock markets.
As a result, Safe said it had conducted detailed research to try and calculate the real level of hot money and found that it was relatively limited. “We have not found evidence of any large-scale capital inflows co-ordinated by any established financial institution,” the regulator said.
On average over the last decade, hot money inflows were $28.9 billion a year, equivalent to around 9 per cent of the increase in the country’s foreign exchange reserves. This compares to an economy now with nominal GDP of around $5,700 billion and where new loans created last year reached Rmb 8,000 billion.
“The argument that cross-border capital flows are driving domestic stock market performance lacks evidence in the data,” Safe said in its report.
Given that Safe is the body charged with policing the country’s capital controls, it has a vested interest in showing that they are not being easily evaded by investors.
However, the figures from the regulator will make it harder for Beijing to suggest that theinflationary pressures in the Chinese economy are the result of the build-up in liquidity in the international financial system caused by the US Federal Reserve policy of quantitative easing.
In the run-up to the G20 summit in South Korea last November, when it looked that China might come under attack for artificially depressing the value of the renminbi, Beijing joined several other governments in accusing the US Fed of causing huge capital flows and inflation in the developing world.
Zhu Guangyao, a deputy finance minister, said that the Fed “did not think about the impact of excessive liquidity on emerging markets by having launched a second round of quantitative easing at this time”.
“If you look at the global economy, there are many issues that merit more attention - for example, the question of quantitative easing,” said deputy foreign minister Cui Tiankai, when asked about US proposals to limit current account surpluses.
Inflation in China increased to 4.9 percent last month, which was not as large a rise as had been expected, but was still well over the 4 percent target the government has set for this year. While some economists believe the current bout of inflation is the result of short-term problems in food production, some others believe it has been caused by the huge expansion in credit that the Chinese authorities have engineered over the last two years to help the economy ride out the global financial crisis.