China to consider hot money policies: report

BEIJING Sun Nov 14, 2010 5:16am EST

Yuan banknotes are seen in this picture illustration taken in Beijing November 1, 2010. REUTERS/Petar Kujundzic

Yuan banknotes are seen in this picture illustration taken in Beijing November 1, 2010.

Credit: Reuters/Petar Kujundzic

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BEIJING (Reuters) - China may deploy a mixture of policies to fend off hot money, an official paper cited a central bank executive as saying at the weekend, amid worries that the United States' policies could create unwelcome flows of capital toward China.

Ma Delun, a deputy governor of central bank the People's Bank of China (PBOC) said such a policy kit would include reserve requirement adjustment, management of foreign exchange positions, and open market operations, expanding on an earlier remark by the PBOC governor.

"The 'pool' mentioned by Governor Zhou Xiaochuan does not refer to a specific market, but an array of policies," Ma was quoted as saying by the Shanghai Securities News on Saturday.

Earlier this month, Zhou said China's existing foreign exchange controls were able to prevent irregular capital inflows, and proposed establishing a "pool" that could help lock and release capital as required.

With the United States weakening the dollar with a second round of quantitative easing, worries are mounting that much of that cash may end up overseas, putting pressure on countries including China to find ways of fending off unwanted capital inflows.

Ma also said the inflation rate that reached a 25-month high in October was within expectations, and the central bank would improve the focus of its monetary policy in future to keep inflation in check.

The PBOC launched fresh tightening measures this week to fight excessive liquidity, including a rise in the reserve ratio for all banks on top of a punitive hike for selected banks.

Ma said the increase in required reserves was intended to reduce money supply to the real economy.

China must continue its exchange rate reform efforts, and allow businesses to adapt by conducting reform gradually, he added.

The yuan's steady ascent picked up steam recently as China stepped up monetary tightening to fight capital inflows. On Friday, spot yuan versus the dollar was up around 2.85 percent since its depegging in mid-June.

(Reporting by Aileen Wang; Editing by Daniel Magnowski)

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