International Law

Sizzling Hot Forex Pours into China

By Stan

Checking out Michael Pettis’s latest on China’s forex reserves is well worth the effort. April numbers have come in, and this @(%$ is unnerving, to say the least. Hot money anyone?

Instead of reducing foreign exchange inflows, the appreciation of the RMB is causing massive hot money inflows (which is not at all surprising, but it has been made much worse by China’s bad luck of having to adjust in the middle of the sub-prime crisis) and so the adjustment must be much more dramatic and much more painful.  No matter how quickly China tries to reduce monetary expansion by appreciating the currency, in other words, monetary expansion grows even faster.

The basic issue here is pretty easy: the currency is allowed to float upward steadily, which encourages others to bring their money onshore to enjoy the revaluation. This has been going on for at least four years now, right?

But the pace of hot money inflows despite the monetary policy and trade tweaks made by Beijing makes this all very distressing. When are we going to see significant benefits from these policies?

Full post as published by China Hearsay on May 27, 2008 (boomark / email).