Lin Min

    GORGE SOROS once again rattled nerves across Asia when he opened his hedge fund’s Hong Kong office early this month. Governments are jittery that the United States’ second round of quantitative easing (QE2) could send hot money flooding into emerging markets like China.

    Two fund managers were reported to be managing US$8 to 9 billion in assets for Soros’ Hong Kong office. Little is known where the money is to be invested. The secrecy surrounding the fund has led to speculation that Soros, notorious for his roles in the collapse of the pound in the early 1990s and the 1997 Asian financial crisis, could be preparing to “short China.”

    Media coverage of Soros’ latest move highlighted worries over hot money that could lead to new boom-and-bust cycles in Asia. Adding to worries, CCTV last week reported more than HK$650 billion (US$99.39 billion) in hot money had arrived in Hong Kong waiting to be funneled into the mainland.

    However, given the mainland’s strict controls over foreign exchange, any attempt to figure out the size of the potential inflows is just a guessing game. KC Chan, Hong Kong’s secretary for financial services and the treasury, later last week said the reported hot money was actually being used to subscribe for IPOs on the SAR’s stock market and was not heading for the mainland.

    Under China’s strict capital controls, foreign exchange is convertible only for import and export trade, approved investments and limited personal use, such as overseas travel and education. Hot money can only find ways into the mainland through underground banks or by artificially ballooning or faking foreign trade. As these illegal channels carry great risks, it would be unlikely for established funds like Soros’ to sneak large sums of money into China via these means.

    The performances of the stock markets in Hong Kong and the mainland this year indicated that unlike Hong Kong, which allows free flows of money across its border, the mainland remains largely off-limits to international hot money.

    Even before QE2 was announced, Hong Kong had been awash with overseas cash as a result of QE1. While international hot money has helped Hong Kong’s Hang Seng Index rise more than 5 percent so far this year, the Shanghai Composite Index has seen a decline of about 11.7 percent. Hong Kong-listed mainland blue chips have been trading at a large premium over the same stocks listed in Shanghai and Shenzhen. The prices of most mainland banks and insurers are more than 20 percent higher on the Hong Kong and U.S. markets than on the mainland bourses.

    International investors favor blue chips, making them more expensive than in their home markets. Blue chips on the mainland have fared poorly so far this year as mainland punters went after small-caps, sending their prices soaring but leaving large-cap blue chips largely in the cold. The difference in investment patterns suggests that international hot money has not been able to enter mainland stock markets in significant levels.

    There is also little evidence that foreign speculators have been significant players in the red-hot housing market on the mainland. Domestic speculators like Wenzhou punters and Shanxi mine owners, rather than foreign names, have made a splash in the home market, although there were reports that some foreign firms were buying office buildings.

    So long as the yuan remains not fully convertible, overstating the threat of hot money to China is unnecessary. Media hype on the subject helped send China’s stock markets into a short-lived bull run in October. The markets have undergone sharp corrections after the central bank took tightening measures and the hot money failed to materialize.

    While some hot money will eventually make it to mainland shores, the central bank seems ready to neutralize its impact.

    Zhou Xiaochuan, the central bank governor, early this month vowed to put any short-term speculative capital in a “pool,” rather than let it spread to China’s real economy. Following an interest rate hike last month, two bank reserve ratio increases this month and more in the pipeline, the central bank seems to be digging that pool quite deep.

    The country’s stringent capital controls will serve as a firewall and ensure that even shrewd financiers like Soros will not get a hand in “shorting China.” For China, the major threat lies in imported inflation — international hot money is expected to push up world commodity prices. And a flood of domestic hot money — unleashed by excess money supply in the past two years — needs greater attention.

    (The author is editor of the Shenzhen Daily News Desk.)