China's Hot Money

Via Bloomberg:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a62kzLqJnBoM
or see AFR 28/03/2008.

``How do you turn this thing off?''
That question, posed by Beijing-based blogger Michael Pettis on March 21, pertains to China's record-breaking buildup of currency reserves. It's an excellent one that connects events in Beijing and Washington like few others.
Press reports and analysts' estimates that China's reserves approached $1.7 trillion in February raise more questions than answers, according to Pettis, a Peking University finance professor. It's unclear where as much as $30 billion of the estimated $57 billion increase came from.
``It can't all be hot money, of course, but all the circumstantial evidence seems to suggest that hot money is accelerating,'' Pettis says.
William Pesek

Well, China buys a lot of stuff makes more stuff out of it and then sells it dirt cheap to grateful US and Australian consumers, thus they build an official currency reserve. Unofficially, it is different as this reasearch from Dr. James K. Galbraith indicates:
http://utip.gov.utexas.edu/papers/utip_45.pdf

Bottom Line minimum scenario:

"If we assume, conservatively, that 30% of the increase in export unit value is due to disguised capital inflows, we find that China is running a much smaller trade surplus. In this case, we estimate that the total disguised capital inflows into the export account were USD $23 billion in 2003, $54 billion in 2004, $95 billion in 2005, and $157 billion in 2006. This accounts for much of the rise in fixed investments as a share of GDP that had occurred up to that point."
Galbraith, Hsu and Jianjun December 30, 2007.

Appears the press has been picking up on this story.


Regards
TheBagwan