Such "hot money" has started to flow into China in large scale since 2003, said Lu Zhengwei, an economist from Industrial Bank. Divided on the exact amount of such capital, economists estimate that such capital could amount to several hundred billions of dollars or even up to $1.75 trillion in their wildest estimates.

The new rules, amending those set in 1997, give authorities more control over trade transactions, allowing them to check invoices to ensure the trade revenues are not being inflated as an excuse to bring unauthorized money into the country. Authorities are also allowed to expand reporting requirements for financial institutions, thus enhancing monitoring of illegal capital inflows.

The regulation also stipulates that when the country's international payments suffer severe imbalances or the national economy encounters a serious crisis, the country can take necessary safeguard measures to tackle the situation.

"It is the first time the country put in place the mechanism of dealing with an international payment crisis," said Zhao Qingming, an analyst with China Construction Bank. The recent financial woes in the US, the eruption of financial crisis in Vietnam and the recent signs of increasing inflow of speculative capital make such a mechanism very important, he said.

An important part of the new rules deals with outflow of capital, which used to be strictly controlled.

China used to lack foreign exchange reserves in the early years of its economic reform and opening up. The previous 1997 regulation, therefore, stipulates mandatory settlements of foreign currencies to increase foreign exchange reserves.

Now that China's foreign exchange reserves have become a headache contributing to many liquidity-related problems, such as inflation, the new regulation formally eased the control.

(China Daily August 12, 2008)