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Billions lie idle in China due to nonconvertible currency

Asia Pulse/XIC, Asia Times, 26 February 1999

BEIJING - The total amount of funds lying idle in China could reach up to 400 billion yuan (U.S.$48.3 billion), experts have warned. International floating funds cannot enter the Chinese market due to the inconvertibility of the renminbi on the capital account and therefore China's money market has been little affected by fluctuations on the international money market.

It is a fact that domestic hot money has made waves on the domestic financial market. The severe turbulence of the stock market, treasury and futures market and stamp market since 1994 were the result of the hot money. Toward the end of March 1997, the national stamp market kicked up an uproar overnight, with the prices of stamps, magnetic cards and coins rocketing. The transaction volume in Beijing, Shanghai and Guangzhou alone reached one billion yuan.

What is the bed for the growth of such floating capital? During the course of economic reform, there has appeared what was known as extra-corporal circulation of funds and rent-seeking and that has made it possible for idle funds to appear. The conversion of enterprises into joint stock companies and the opening of the stock market and futures market since the late 1990s have provided not only the space but also the cumulative mechanism for huge amounts of floating capital to form and move.

On the other hand, modern trading means and the highly efficient clearing system for stock and futures markets have created the conditions for huge amounts of hot money to move and transfer.

During the course of the reform of the financial system, there have appeared a large number of non-financial organizations, including trust and investment companies and securities companies, mostly run by banks. They have close connections with banks. Once the stock market offers opportunities, banks would borrow money from securities companies by violating the rules and that is an important channel for the formation of hot money.

It can be said that the loopholes that appeared in the reform of the economic system are the deeper cause of hot money.

Now there are nearly 100 funds on the securities market, absorbing more than 100 billion yuan. However, due to the lack of mutually restricting mechanisms of investor, trustor and broker, there has been considerable confusion in regard to investment.

Some use their funds to speculate on the property market; some speculate on the stock market. In order to make exorbitant profits, most of the money has become floating capital.

Due to rule-violating and off-the-books operations by banks and non-financial organizations by exploiting the imperfection of the credit management system, the lax enforcement of internal rules and regulations in banks and the insufficient display of the regulatory functions of the central bank, a considerable amount of money has been siphoned into the market to become social idle funds.

The amount of bank savings by Chinese residents reached 911 billion yuan in 1991 and the figure went up to 5340.7 billion by 1998, increasing by 4429.7 billion in eight years. This presents a sharp contrast to the growth of investment means. Apart from bank savings, there is hardly any other option for residents.

Once opportunities are in the offing, considerable short-term deposits would converge into the securities market and futures market in order to seek high returns. This is also a factor contributing to the formation of idle funds.

Now the huge amount of capital that is floating on China's capital market has in fact constituted the most opaque, the most non-standard and the most non-stable part of the national economy.