BEIJING–China on Tuesday pledged to tighten efforts to stem the flow of speculative money into the country, after criticizing the U.S. Federal Reserve for pouring billions of dollars into the struggling U.S. economy. The State Administration of Foreign Exchange said in a statement that it would strictly manage quotas for financial institutions’ short-term overseas borrowing. It will also closely inspect fund-raising proceeds by overseas-listed Chinese firms and foreign direct investment, the agency added. The latest measures came amid widening international criticism of the Fed’s “quantitative easing” policy of printing billions of new dollars to stimulate the U.S. economy, especially among emerging economies. China’s Vice Finance Minister Zhu Guangyao told reporters on Monday that the United States had a responsibility to those emerging economies that are vulnerable to floods of speculative capital. The country’s state Xinhua news agency on Tuesday went so far as to suggest the Group of 20 major economies should monitor policy shifts by the U.S. central bank.
World leaders are preparing for two key summits this week expected to focus on efforts to rebalance global trade — the Group of 20 meeting in Seoul and the Asia-Pacific Economic Cooperation forum in Yokohama, Japan. Xinhua said in a commentary the Fed was “risking the global recovery by following its own track for economic revival”. “There is an urgent need for the G-20 … to set up a new mechanism that effectively monitors the issuer of the international reserve currency, especially when it is not able to carry out responsible currency policies,” it said. “It is necessary for the issuer of the international reserve currency to report to and communicate with the G-20 Group before it makes major policy shifts.” China and other emerging economies worry that much of the new U.S. money will flood their financial markets, with players seeking higher non-dollar returns. Speculative “hot money” enters and exits countries in hope of making swift profits, and is considered risky because it often flows out at the first sign of weakness in an economy, exacerbating any problems. The excessive inflow of funds also complicates Beijing’s ongoing efforts to mop up the liquidity that is pushing up domestic asset prices and fuelling inflation, which has accelerated to its fastest pace in almost two years. The regulatory agency has said investigations uncovered US$7.34 billion of non-compliant foreign exchange transactions from February through October and criticized six banks for violating rules. The regulators also said they would set a minimum level for foreign exchange positions that banks must hold overnight, a shift from previous rules that require banks to hold either some or no foreign exchange positions. Analysts have said banks in China are currently reluctant to hold foreign exchange positions, primarily weakening U.S. dollars, due to fears of exchange rate losses.