Friday, July 4, 2008

BEIJING | Beijing is tightening financial controls on trade to curb multibillion-dollar flows of speculative “hot money” into China, which regulators say could fuel inflation, the government announced Thursday.

Beijing is trying to stop financial inflows that evade China’s strict controls and are thought to be adding to pressure for prices to rise at a time when inflation is at 12-year highs. Speculators are thought to be trying to profit from a rise in China’s currency, the yuan, against the U.S. dollar.

Authorities will start checking invoices to make sure they are not being inflated as an excuse to bring extra money into China without approval, the State Administration of Foreign Exchange said on its Web site, It said the measures take effect July 14.

The move was unexpected and “warns speculators that the government will use any relevant policy measures — rather than only exercising monetary policy tools - to curb hot money and inflation,” said Sherman Chan, a Moody’s analyst, in a report to clients.

Ms. Chan warned that the new system will slow trade and could hurt growth.

“The verification process may be lengthy unless the government devotes a large amount of resources to it,” she said. “The new checking system — which will certainly slow foreign trade — is expected to have a dampening impact on economic growth.”

China is one of the world’s biggest traders, with exports of $1.2 trillion and imports of $955.8 billion in 2007.

The yuan does not trade on world markets. Beijing allows money to enter the country for trade and investment but closely monitors such transactions.

Speculators who want to profit from the rising yuan are thought to be buying real estate and other Chinese assets that will then rise in dollar terms. One way to get money into China is for companies to pad their foreign trade invoices.

The government does not release figures on how much unauthorized money is thought to enter China. But the official Xinhua News Agency, citing unidentified analysts, put the figure at $147.9 billion in the first five months of this year.

Regulators are trying to cool inflation that pushed up consumer prices 7.7 percent in May over the same month last year.

The true impact of “hot money” inflows in China’s huge economy is unknown. Even without them, the legitimate influx of money from China’s swollen trade surplus has sent cash flooding through the economy, fueling a stock and real estate boom.

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