Analysts have estimated that China’s foreign exchange reserves increased by approximately $80 billion in January, 2008, mainly as a result of capital inflows from Hong Kong.
Since July 2005, when the Chinese government de-linked the yuan from the US dollar, the value of the yuan has risen approximately 16 percent due to China’s huge trade surplus and the massive capital inflow into the country. Experts have predicted that the appreciation of the yuan will increase at a faster pace because investors from Hong Kong are speculating to make profits.
Consequently, sometime within the first half of this year, China is expected to initiate revised foreign exchange rules in an attempt to tighten control on illegal capital inflows and at the same time implement a comprehensive framework for the supervision of the capital inflows. Furthermore, the Chinese government hopes that the revised rules will improve the monitoring of the illegal funding, in an effort to determine exactly which sector the money is flowing into.
As part of the government’s effort to control the overheated economy, the authorities are concerned that the capital inflow will make it difficult for them to control certain overheated components of the economy, such as the property market.