Shanghai: China will force banks to hold more foreign exchange and strengthen auditing of overseas fund raising as part of efforts to crack down on hot-money inflows.

The State Administration of Foreign Exchange will tighten management of banks' foreign-debt quotas and introduce new rules on their currency provisioning, the regulator said in a statement on its website. The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.

The measures underscore concern around the world that the Federal Reserve's decision last week to buy its own debt to keep borrowing costs near zero will cause investors to seek higher yields in emerging markets. Chinese and European leaders have said they plan to discuss the impact of quantitative easing at the Group of 20 summit this week in Seoul as well as the dangers of competitive currency devaluations.

Loopholes

"Some international funds will flee from dollar assets because of the Fed's easing, and China's SAFE is trying all means to plug loopholes in possible channels for hot-money inflows," said Zhao Qingming, a senior financial-market analyst at China Construction Bank Corp. in Beijing, the country's second-largest lender.

The regulator said that a bank's daily net dollar positions, in expired forward contracts and spot greenback holdings, should not be less than yesterday's levels.

Forcing banks to keep hold of the US currency will limit their ability to meet orders for yuan purchases. "This is to ask banks to hold more foreign currency to help ease pressure on the growing size of China's foreign-exchange reserves," Zhao said. "To some extent, it can help limit yuan gains in the short term."

The People's Bank of China reported a record $100 billion (Dh367 billion) jump in its foreign-exchange reserves to $2.65 trillion for September. China's foreign debt totalled $513.8 billion at the end of June, including $343.8 billion of short-term debt, according to SAFE data.

Inflows

The rules are aimed at "further curbing inflows and settlement of non-compliant funds," the foreign exchange regulator said. They are designed to "maintain China's economic and financial security," it said. The yuan jumped 0.16 per cent to 6.6674 per dollar as of 1.37pm in Shanghai, bringing gains this year to 2.3 per cent, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards reflect bets the currency will strengthen 3.2 per cent.

The US Federal Reserve's decision to pump $600 billion into the economy might "shock" emerging markets by flooding them with capital, Chinese Vice Finance Minister Zhu Guangyao said yesterday in Beijing. \

China's capital controls can block abnormal inflows of money, central bank Governor Zhou Xiaochuan said at a forum in Beijing last week.

Misaligned currencies

China's exchange rate is undervalued by 20 per cent against the dollar and Singapore, Switzerland and Taiwan should also be censured for intervening in foreign-exchange markets, according to an analysis by the Peterson Institute for International Economics.

China's yuan is 17 per cent undervalued on a trade-weighted basis, while Singapore's is 29 per cent below its "fundamental equilibrium exchange rate" on the same basis, says the study by the Washington-based research group. While the Swiss franc is fairly valued against the dollar, it's 5 per cent undervalued on trade-weighted terms, it said. The topic of misaligned currencies is set to take centre stage at this week's Seoul summit of leaders from the G20 amid concern some nations are devaluing their way to prosperity.