‘Hot Money’ Adds to China Asset Volatility, Fan Says

Bloomberg | December 28, 2009 | 04:31 EST

Inflows of speculative capital, or “hot money,” are contributing to volatility in China’s stock and property markets, said Fan Gang, the academic member of the central bank’s monetary policy committee. While the inflows help make it cheaper to borrow, “it will also cause asset bubbles,” Fan said at a financial forum in Beijing today. He also said that capital will keep heading into emerging markets for “a considerable period” because of limited or zero growth prospects in the industrialized economies. Fan’s warning comes a day after Premier Wen Jiabao pledged to tackle excessive property-price increases in some parts of the nation, citing taxes and loan rates as possible tools. China’s policy makers are trying to secure an economic rebound while avoiding the stock and housing bubbles that plagued the U.S. this decade.

While the Shanghai Composite Index has fallen more than 8 percent from this year’s peak in August, it remains up 75 percent for 2009. China’s property benchmark, which measures prices in 70 cities, rose the most in 16 months in November. Fan is among Asian officials who have warned in recent weeks that the U.S. Federal Reserve’s policy of keeping its benchmark interest rate near zero is spurring global liquidity that’s heading to emerging markets.    

Rate Stance

“Because of uncertainties in the global outlook, the European Central Bank, the Federal Reserve and other central banks are likely to stay reluctant to raise rates or exit stimulus, which will result in more arbitrage trading or speculative funds flowing to emerging markets,” Fan said today. Separately, he forecast China’s economy may grow 8 percent to 9 percent in 2010 as property investment grows at a faster pace, private-sector production increases and exports recover, giving the world’s third-largest economy a further boost as the impact of government stimulus gradually fades. Fan, who heads the National Institute of Economic Research, said this was his personal view. A $585 billion stimulus package and a record $1.3 trillion of new loans in the first 11 months spurred acceleration in China’s economic growth in the past two quarters. Gross domestic product rose 8.9 percent in the three months through September from a year earlier.

Growth Path

Quarterly growth may slow from the second quarter of 2010, Fan said today, adding that the slower pace doesn’t mean China will have a “second-dip,” referring to a renewed slowdown. China’s currency, the Yuan, “has no reason to depreciate against the U.S. dollar or other currencies,” Fan also said today, citing reasons for long-term strength including the nation’s generally low inflation, rising productivity and a relatively low debt to gross domestic product ratio. “Moreover, when you depreciate, other currencies can follow suit and result in competitive depreciation, so in the end you won’t benefit,” he said.

China has held the Yuan at about 6.83 per dollar since July last year, shielding its exporters from the slump in global demand. Premier Wen reiterated yesterday his government will “absolutely not yield” to calls for currency gains. The International Monetary Fund has said the Yuan is “undervalued.” China’s exchange-rate policy should be based on the nation’s need for balanced growth, “follow the trend of global currencies increasing in number,” and take into account the increased competition that China has with other emerging markets, Fan said, without elaborating.


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