In 2003, the amount of hot money flowing into China was US$82.8 billion, in 2004, it was US$114 billion, and last year, it was US$46.7 billion. Although the inflow of international hot money decreased slightly last year, it has climbed to US$18.6 billion in the first quarter of this year, accounting for 40 percent of last year's total.
On the whole, China's interest rate hike of 0.27 percent is unlikely to prevent China's economy from overheating, and it will instead highlight the predicament facing the Chinese government. It will lead to higher expectations for the yuan to appreciate and an increase in the influx of foreign exchange, which in its turn will lead to the continued overheating of the economy and a renewed pressure to increase interest rates and adjusting the exchange rate.
Until the imbalance in the exchange rate has been thoroughly dealt with, China can in the short term only continue to tighten policies and coordinate credit, administrative and land policy measures in an all-out effort to relieve the pressure resulting from the imbalances in the economy.
In the future, the Chinese government might raise the required reserve ratio by 0.5 percent to 1 percent in order to freeze 150 billion yuan to 300 billion yuan of bank capital. It might also raise the criteria for approving investments and the use of land, thereby accelerating the industrial structural adjustment and restricting the development of real estate.
It cannot even be ruled out that a moratorium on loans to overheating industries will be issued.
Tung Chen-yuan is an associate professor in the Sun Yat-sen Graduate Institute of Social Sciences and Humanities at National Chengchi University and director of the Cross-Strait Interflow Prospect Foundation's China Economic Analysis project. Wong Guo-chen is an assistant in the project.
Translated by Daniel Cheng
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