Beware of asset bubbles as 'hot money' flows in
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China needs to guard against asset bubbles and other problems associated with the inflow of speculative capital, or "hot money," into the country, which continues to increase amid the uncertain global economy, according to Fan Gang, a renowned economist and advisor to China's central bank,?at a recent forum.
The latest foreign exchange reserves figures released by the People's Bank of China in December 2009 reveal that inflows increased by about $37.2 billion – the second highest monthly rise during the year – to $2.78 trillion by the end of November.
Economists have warned that $16 billion out of the monthly increase could well be "hot money" inflows.
Short-term low growth in developed countries has prompted the inflow of hot money into China, Fan said.
The volatility seen in China's capital and property market is partly caused by the huge inflow of hot money, he pointed out, urging the government to beware of asset bubbles and prevent possible negative impact on the country's economy.
Fan also predicted that developed economies will grow at a low level in 2010 and a lot of uncertainties lie ahead, curbing demand for China's exports.
"The world economy has been steered clear of a great depression, but it will still remain uncertain for a certain time, A slow growth is possible for the next one to three years," Fan predicted. "The US economy might reach its second bottom-out growth of below 1 percent."
In the long run, as a result of the financial system reform, the U.S. will see a rising savings rate and its consumption will not recover to the pre-crisis level; other countries will also keep their debt ratios low, which will lead to a fall in consumption.
