Hot money inflows targeted

Warnings to be issued to companies if capital flows fail to match trade

China's top foreign exchange watchdog has vowed to tighten supervision of cross-border capital flows through international trade in a major effort to block speculative money inflows which have helped push the yuan to record highs in recent weeks.

The State Administration of Foreign Exchange said on Sunday it would increase scrutiny on exporters who channel money into the country disguised as trade payments.

It said in a statement it would hand down warnings within 10 days if it finds that a firm's capital flows do not match physical goods shipments, or if the firm is channeling unusually large amounts of money into China.

Such companies will then be placed on its "B list", which is for companies that are more closely monitored, for three consecutive months and will only be moved back onto the "A list" if all the relevant indicators return to its normal range.

The SAFE said it will require banks to report suspicious transactions and take affirmative measures to prevent abnormal cross-border capital inflows as well as maintain a reasonable growth of trade financing.

"Banks are not allowed to assist customers to evade foreign exchange regulations," the statement said.

Companies and banks who break the regulations face being fined or closed, and their practices exposed to the public, the SAFE said.

It said the first batch of warnings are likely to be sent out before Friday, and the tightened regulatory measures will take effect starting from June 1.

Liu Yuanchun, assistant dean of the School of Economics at the Renmin University of China, said that inflows of speculative funds have been stimulated by easing monetary policies in the United States and European countries.

"Funds seeking new investment opportunities have been returning to China since the second half of last year, as the US economy entered a slow recovery with the end of the financial deleveraging process, and the eurozone debt crisis was defused," Liu said.

He said the Chinese regulator is keeping a close eye on any further rounds of foreign speculative investments, which may harm the country's financial stability and threaten economic growth.

According to the National Bureau of Statistics, export values increased 18.4 percent in the first quarter from a year earlier, sharply accelerated from the 7.9 percent for the whole year of 2012.

Imports were boosted 8.4 percent year-on-year in the first quarter, compared with 4.3 percent last year.

Exports in March increased by 13.5 percent year-on-year, down from a 20.6 percent expansion in February, the General Administration of Customs said.

China registered a trade deficit of $884 million in March, but the funds outstanding for foreign exchange continued to increase for the third consecutive month, evidence of "hot money" inflows, analysts said.

Although the data showed faster export growth, the true situation may not be so optimistic, according to Wang Xuekun, deputy chief of the Research Institution of the Ministry of Commerce.

Data showed that in the first three months, exports from Shenzhen in Guangdong province increased 70 percent, and imports almost doubled from a year earlier, which was unreasonable, Wang said.

Excluding Shenzhen, the average export value in other areas rose a little more than 10 percent, and imports decreased in the first quarter compared with a year earlier, he added.

"The growth in imports and exports is expected to be slower than the government's target of 8 percent this year.

"It is especially difficult in the first half, because of external uncertainties which will act as a downside headwind to economic growth," Wang said.

Zhu Jianfang, chief economist with CITIC Securities Co Ltd, said that global funds are seeking higher returns in emerging markets, and that capital flows into China have been increasing since the end of last year.

"Overseas speculative funds that bypassed the SAFE's foreign capital regulations through fake cross-board trades are one of the reasons for the boost in export value," Zhu said.