In 2006, the number of hedge funds targeting China stocks surged to 63 from 22, and market values also increased by 160 percent so far, which makes a profit-taking move reasonable.

The retreat could happen either between March and April, when the first-quarter losses were disclosed, or between June and July during the release of the half-year reports, according to the report.

According to an article last September in Financial Research, a magazine sponsored by the central bank, if more than US$200 billion of funds retreat from China simultaneously, the domestic capital market would see 1.5 trillion of assets oversupplied overnight, which would smash prices on capital goods and lead to disasters both in the stock and the property markets.

Balanced policy needed

In order to reduce the impact of hot money on China's economy, financial authorities should prevent speculative funds from sudden retreat as well as from excessive influx. The art of such a delicate balance surely tests the regulator's wisdom, according to the report.

The report suggested that the regulator should adopt a flexible adjustment for the scope and pace of yuan appreciation in controlling hot money influx, and refrain from large scale or one-off appreciation moves.

It also called for a comprehensive review of the supervision system on foreign trade to stem the influx of hot money.

Meanwhile, relevant rules should be improved to regulate speculative funds' purchase of domestic properties, stocks, and shares of non-listed firms, it said.

Risk exaggeration?

However, some experts said the report had overstated the hot money problems, although close supervision is definitely needed.

"The problem of speculative capital is not so serious in China," said Wang Zhihao, chief of the research department of Standard Chartered in China. According to him, instead of wiping off all the hot money, the Chinese government should strengthen supervision and guide the extra foreign funds into the substantial economy, which is thirsty for funds, especially in areas such as rural, central and western regions.

(Chinadaily.com.cn March 19, 2008)