Money inflows a real worry

China should remain wary of hot money inflows as investors and speculators turn to emerging economies in the wake of the sub-prime crisis, a central bank advisor said at the Boao Forum for Asia.

"China is seeing an even stronger capital inflow now, despite some nations suffering a credit crunch," Fan Gang, a member of the central bank's monetary policy committee, said.

China's foreign exchange reserves, the world's largest, increased by $153.9 billion in the first quarter, compared with $135.7 billion during the same period a year ago. But less than one third of the gain could be attributed to its $41.4 billion trade surplus during the same three-month period.

"Investors are seeking investment opportunities, but obviously they're not going for the time being to Western countries that are seriously hit by the credit crunch. They'll turn to emerging markets such as China and India," Fan said.

Meanwhile, the renminbi's appreciation compared with the US dollar is also attracting speculators, Fan said. "The capital inflow will add up to excessive liquidity and worsen inflation."

China is now battling its worst inflation in more than a decade. In February, the nation's consumer price inflation increased 8.7 percent, the highest in 11 years. The government has adopted a slew of measures, such as credit control and temporary price intervention, trying to reduce inflation to about 4.8 percent this year.

Meanwhile, the government has sought another remedy by allowing the currency to appreciate faster. Its value increased 4.2 percent in the first quarter alone.

While Fan said the key task for this year's financial policy was still dealing with excessive liquidity, he did admit the capital inflow might help offset the potential impact of the sub-prime crisis.

A serious US recession and an ensuring slowdown of China's exports to the nation could cost as much as 1 percentage point of China's GDP growth, Fan estimated.

Currently, the US market absorbs 23 percent of China's total exports, while fast-growing East Asian economies receive about 30 percent.