Careful handling of hot potato

Authorities need to crack down on illegal activities that are facilitating the influx of speculative capital

China is under mounting pressure from an influx of short-term capital, as is indicated by a newly increased 1.22 trillion yuan ($198.4 billion) in its funds outstanding for foreign exchange in the first quarter, a big increase on the 494.6 billion yuan for the whole of last year. The country's capital and financial account surplus has also soared, to $101.8 billion in the first quarter of this year, up from only $20 billion in the fourth quarter of last year.

Short-term capital, other than direct investment and securities, has constituted the lion's share of China's newly increased capital influx in recent months. This speculative capital has chosen to flow into China mainly through transfer pricing in trade transactions, especially through over-reporting of export volumes, instead of via normal financial channels. The evidence is China's unbelievable year-on-year export growth over the past months, a growth that has drawn wide speculation.