The huge inflows of hot money speculating on the mainland economy are a time bomb that could devastate the country's financial system, according to a report by Industrial and Commercial Bank of China.
The report, which estimates that more than US$500 billion of the mainland's US$1.81 trillion hoard of foreign cash is speculative, will add to widespread fears that a sudden outflow of foreign capital could put unmanageable stress on the mainland's currency regime.
'The several hundred billion US dollars of hot money [parked in the mainland financial system] is like a time bomb,' the Nanfang Daily newspaper quoted the ICBC report as saying.
'Now that economic conditions at home and abroad have deteriorated, it is possible that hot money could suddenly leave the mainland market. This would have a high chance of causing a huge negative impact.'
Total foreign exchange holdings grew by US$280.6 billion in the first half of the year, far more than the combined total of trade surplus inflows and foreign direct investment, leading many economists to conclude that hot money accounted for the surplus.
Speculative inflows may have been as high as US$180 billion in the first six months, roughly twice last year's full total, according to an estimate by Stone and McCarthy Research Associates.
Aside from pumping up the money supply and helping to stoke inflation, there is widespread concern in Beijing that any sudden outflow of foreign capital could seriously damage the country's still immature banking system.