Recently the People's Bank of China released data on the state's foreign exchange reserves as of the end of 2009. According to some analyses, in 2009 China witnessed an increase of USD453.1 billion in its foreign exchange reserves. Deducting the trade surplus of USD196.07 billion and the actually utilized foreign capital of USD90.03 billion during the same period, there is a balance of USD167 billion, which is regarded as unaccountable, that is, an inflow of hot money.A reporter interviewed a relevant official of the SAFE on this issue.
Q: How do regard the estimation method for the newly-increased foreign  exchange reserves minus the trade surplus and minus the actually utilized foreign capital equals hot money,which is presently widely used by the general public?
A: We appreciate the analyses from the general public on the operating conditions of the balance of payments from different perspectives, as well as their suggestions on our work on foreign exchange administration. To be frank, the above estimation method is unscientific, thus the conclusion is misleading. With regard to the newly- increased balance of foreign exchange reserves, analysts should not only emphasize factors such as foreign trade conditions, foreign direct investment, and so forth, but also should take into consideration the conditions for cross-border fund flows for trade in service, individuals, external debts, and securities investment as well as the investment income of the foreign exchange reserves, currency conversion, and other factors. A simple deduction of the trade surplus and the actually utilized foreign exchange will not account for the so-called unaccountable reserves, let alone the inappropriate label of hot money.
Q: Can you describe in detail how the newly-increased foreign exchange reserves should be analyzed by taking into account the investment income and currency conversion?
A: We have noted that some media have taken into consideration the investment income and income from currency conversion to analyze the newly-increased foreign exchange reserves. As per the relevant requirements of the foreign exchange administration, for the time being we cannot disclose the specific data on the investment income and currency conversion. Nevertheless, selection of the relevant data can be used as a reference.
For example, according to the changes in the exchange rate index of the USD against other major currencies which is compiled by the FED, the exchange rate of the USD depreciated by 8.5% in 2009. As shown in the data on the structure of global reserves released by the IMF, the non-dollar reserve assets account for nearly 40% of the total reserve assets. Hence, the appreciation of non-dollar assets against the USD in 2009 will inevitably lead to an increase in the balance of foreign exchange reserves in USD (income from currency conversion).
As another instance, by use of the frequently-adopted Barclays Return Rate of the Global Bond Integrated Index, the annual average return rate from 2005 to 2009 was 4.8%. Based on that, the aggregate investment income from a certain amount of the balance of reserves for various years can be calculated, i.e., to what extent investment income contributed to the increase in the foreign exchange reserves.
Although these analyses are only for reference, they will help prevent significant omissions in the selection of analytical methods, thus their conclusions will be more convincing.
Q: Could the increase in foreign exchange reserves in 2009 be better explained, if investment income and currency conversion are taken into consideration?
A: With regard to our data, the argument that the increase in foreign exchange reserves in 2009 is unaccountable is unreasonable.
Q: Some argue that there will be increasing inflows of short-term speculative funds into China in 2010. How do you regard that?
A: With the stable growth of the national economy and the constant decline in the USD interest rate in the past months, those entities involved in foreign exchange businesses (banks, enterprises, individuals, and so forth) are more likely to transfer their overseas assets back to China and to make settlements. Meanwhile, it is possible that some overseas speculative and arbitrage funds will flow into China by means of distribution and infiltration through such channels as trade, individual investment, foreign investment, and so forth. Currently, China maintains a certain level of control over capital accounts. Based on the premise to promote the facilitation of trade and investment, we will continue to intensify efforts to crack down on illegal flows of cross-border funds.
Q: What about the progress and achievements in cracking down on illegal flows of cross-border funds during the past year?
A: In 2009, by taking full advantage of the United Office for Cracking Down on Criminal Activities of Illegal Foreign Exchange Transactions and closely teaming up with the public security departments, we launched a series of campaigns to crack down on major cases of illegal flows of funds, such as underground money shops, online foreign exchange speculation, and so forth The SAFE uncovered 10 cases of underground money shops, 6 cases of online illegal foreign exchange speculation, and 11 cases of illegal trading of foreign exchange, and discovered more than 61 nests for illegal foreign exchange transactions, involving a total amount of USD3.54 billion.
Q: What measures will the foreign exchange administration departments adopt to prevent the inflow of speculative and arbitrage funds in 2010?
A: To prevent the inflow of speculative and arbitrage funds, which may affect the stability of the national economy and finance, we will take the following measures: (1) strengthening the construction of the statistical system for the balance of payments, establishing and improving monitoring, an early-warning system, and an emergency plan for the inflows and outflows of cross-border funds; (2) strengthening the administration of cross-border capital flows, continuing to crack down on illegal inflows of funds, and taking appropriate measures to control the channels for the excessive inflow of capital; (3) further promoting the convertibility of the capital accounts, broadening the channels for capital outflows, and facilitating the holding and use of foreign exchange by domestic institutions and individuals; and (4) taking comprehensive and effective measures to promote an equilibrium in the balance of payments by complying with the unified planning of the Central Government.