China Should Extend Crackdown on `Hot Money,' Researcher Says

By Belinda Cao

July 3 (Bloomberg) -- China's should extend its crackdown on so-called ``hot money'' speculating on yuan gains to include the services industry, a government researcher said.

Speculators have shifted channels of sending funds into China this year to trade in services, said Li Youhuan, a researcher at the Chinese Academy of Social Sciences in Guangdong Province. China's currency regulator yesterday tightened controls on exporters of goods by requiring them to register foreign-currency income on a centralized database.

``The monitoring measures need to be more specific and detailed,'' said Li, who wrote an investigative report last year on how hot-money came into China through underground dealers. ``Otherwise, speculative-money can always find loopholes to go around the supervision.''

Since China scrapped a decade-long link of about 8.3 to the dollar almost three years ago, the currency has risen 21 percent as increased exports drive the nation's trade surplus to a record and overseas investors buy Chinese stocks and property.

China's yuan accelerated the pace of appreciation this year, gaining 6.6 percent versus the dollar in the first half, nearly matching that for the full year of 2007.

Foreign-exchange reserves surged 40 percent to $1.68 trillion in March from a year earlier, flooding the economy with cash and fueling inflation.

There's about $500 billion of ``hot money'' invested in China, Li said.

The State Administration of Foreign Exchange is requiring banks to verify the authenticity of trade with related agencies via a shared database before money conversions and transfers, according to a notice it posted on its Web site yesterday.

``A lot of extra foreign funds have made their way into the Chinese system to gain form yuan appreciation and SAFE has decided to stop this, as it increases liquidity and inflation,'' Dwyfor Evans, a currency strategist at State Street Global Markets in Hong Kong, wrote in a note to clients.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net