By Belinda Cao and Aaron Pan
July 7 (Bloomberg) -- China is drafting regulations to control cross-border payments for services to curb rising inflows of ``hot money'' betting on gains in the yuan, according to an official at the nation's currency regulator.
Controls on international payments for consultancy or franchising fees are ``relatively weak'' and need to be strengthened to stop speculative capital inflows, said the official at the State Administration of Foreign Exchange, who declined to be named. The regulator is consulting with agencies including the commerce ministry on details before announcing the new rules, he said.
``This shows China is serious and well aware of these flows that are coming in,'' said Patrick Bennett, a currency strategist with Societe Generale SA in Hong Kong. ``They want a better and more regulated system and I expect it to be successful.''
The yuan has risen 21 percent since China scrapped a decade-long link to the dollar three years ago as increased exports drove the trade surplus to a record and overseas investors bought Chinese stocks and property. The inflows of cash helped stoked inflation, which reached 8.1 percent in the first five months, compared with a rate of 4.8 percent last year.
China's currency was little changed at 6.8565 versus the U.S. dollar as of 11:12 a.m. in Shanghai, from 6.8589 at the end of last week, according to the China Foreign Exchange Trade System.
`More Difficult'
Foreign-currency income from the services trade, which includes transport, tourism, insurance and marketing, rose 33 percent in 2007 to $122.2 billion, outpacing the 26 percent increase in the value of exported goods to $1.2 trillion, a June 5 report showed.
``It is more difficult to monitor trade of services than that of goods,'' said Mei Xinyu, a researcher at the Ministry of Commerce in Beijing, ``We still lack good methods to check if prices in cross-border services are fair or not.''
The regulator tightened controls on exchange of goods July 2, asking exporters to register foreign-currency income on a central database shared by regulators and banks. It also announced rules for tracking companies' prepayment receipts from overseas buyers and deferred payments for imports.
The measures were to ``prevent borrowing risks and potential large-scale capital outflows in the future,'' the regulator said in its online statement.
``Trade will become a major exit channel for speculative capital, should a flight happen,'' Mei at the commerce ministry said.
No rules can completely block speculative capital, said Li Youhuan, a researcher at the Chinese Academy of Social Sciences, Guangdong Branch.
To contact the reporters on this story: Belinda Cao in Beijing at lcao4@bloomberg.net; Aaron Pan in Hong Kong at apan8@bloomberg.net.
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