Forex regulator warns potential risks still exist despite negative flow of 'hot money' last year

China's foreign exchange regulator has warned of the potential risks of increased capital inflows in 2013, despite annual calculations showing that the flow of "hot money" turned negative last year.

There have been ongoing fears that China may face a rebound in capital inflows this year, partly due to the ongoing loosening in monetary policies by developed countries as well as growing interest in the Chinese economy from foreign investors.

In a cross-border capital flow report released on Thursday, the State Administration of Foreign Exchange said China still faces a possible rebound in money inflows and possible fluctuation in both directions.

"Emerging economies are subject to capital inflow pressures and currency appreciation, due to the excessive easing in monetary policies adopted by major economies," said the report.

It warned such easing should not be seen as a panacea, and that it has triggered rising uncertainties around the globe.

"Emerging economies must be aware that once the risks start to accumulate again, they will face growing capital outflow pressure and currency devaluation."

The report vowed that SAFE will strengthen its monitoring of cross-border capital flows, and was ready to act against any fluctuations, especially massive inflows.

Its remarks came after Federal Reserve Chairman Ben Bernanke suggested on Tuesday that further monetary easing was on the way for the US, saying the Fed's initiative in bond purchases is creating a stronger recovery at home and "mutually beneficial" results for other countries.

China's annual measure of "speculative capital inflows" turned to a negative $320 billion for 2012, according to the report.

But SAFE said it could not simply be translated into "hot money outflows" or "capital flight".

In 2011 China announced an official estimation of short-term speculative capital to the public for the first time, indicating an influx of $35.5 billion in 2010.

SAFE said the usual calculation method of deducting its trade surplus, direct investment inflows, returns of outbound investment, and capital raised from overseas stock markets, from increases in foreign reserves, does not meet with the new global economic environment, as the yuan's exchange rate has come close to the equilibrium level.

The report also showed that total capital flows stood at $1.97 trillion in the first three quarters of 2012, up by 3 percent year-on-year.

Capital flows as a percentage of GDP during the same period dropped 4 percentage points to 35 percent.

Last year, the flow of capital in and out of China fluctuated dramatically, as the world's second-largest economy witnessed inflows in the first quarter, outflows in the second and third quarter, and comparatively large net inflows again in December. Throughout 2012, China posted a $117.3 billion deficit in its capital and financial account, in contrast to a surplus of $221.1 billion in 2011.

SAFE had reported that the deficit in 2012 was mainly due to investor preference for holding assets in foreign currency while keeping debt in local currency.

"As China continues to open up the capital account and float the yuan globally, the country is getting more connected with external economies, which presents a greater challenge to manage cross-border capital flows."

Contact the writer at [email protected]