Q: Recently the PBOC publicized China's balance of foreign exchange reserves at the end of September. There was a substantial increase in the amount of foreign exchange reserves in Q3, 2010. How do you regard this increase?

A: At the end of Q3, 2010, China's balance of foreign exchange reserves reached USD2648.3 billion, up USD194 billion as compared with Q2, 2010. During the first half of 2010, the balance of foreign exchange reserves increased by USD55.1 billion from the previous year.

The rapid increase in foreign exchange reserves in Q3, 2010 can be ascribed to three factors: (1) China's foreign-related economy continued to grow. In Q3, 2010, the country posted a foreign trade surplus of USD65.3 billion, exceeding the surplus of USD55.3 billion in H1, 2010. China's utilized foreign investment reached USD6.924 billion and USD7.602 billion respectively in July and August of this year. (2) Some large-scale Chinese enterprises initiated public offerings on overseas markets, with large sums of foreign exchange settled by banks. For example, the Agricultural Bank of China raised more than USD10 billion by going public on the Hong Kong stock market. (3) The conversion of currencies and fluctuations in asset prices also contributed to the substantial increase in foreign exchange reserves. The fluctuations caused by changes in non-transactional values such as exchange rates and prices are included in the data publicized by the PBOC. In Q3, 2010, there was an appreciation of major non-dollar currencies, especially the Euro, against the US dollar. The exchange rate of EUR/USD posted an increase of 11 percent in Q3, 2010. The conversion of non-dollar currencies into US dollars and the fluctuations in the prices of assets led to an increase of more than 80 billion US dollars in the countrys foreign exchange reserves. The 15-percent depreciation of the EUR against the USD during the first half of 2010 reduced the increase in Chinas foreign exchange reserves. In addition, the operating income from foreign exchange reserves also contributed to the rapid increase in Chinas foreign exchange reserves.

Q: Financial statistical data publicized by the PBOC indicate that in September there was an increase of RMB289.565 billion in outstanding foreign exchange funds. Does this imply a new round of hot moneyinflows? What is your point of view on pressures of fund inflows in China for the foreseeable future?

A: Recently there have been comments that hot money is again flowing into China. Such comments are based on the calculation that hot money = newly-increased funds outstanding for foreign exchange  surplus in trade utilized amount of foreign investment. Such a method of calculation is unscientific because it neglects the transactional items in the balance of payments, including services, income, portfolio investment, and so forth. Furthermore, it makes comparisons between statistical data of different categories, without specifying the elements and formation mechanisms of the outstanding foreign exchange funds. Thus, the conclusion is untenable, providing misleading information for an understanding of real cross-border fund flows.

China will, in the short term, cope with relatively high pressures of fund inflows. The country enjoys high stability of macroeconomic operations, a promising outlook for economic growth, a tendency for the home currency to appreciate, and a strong attractiveness for foreign investment. But there exists some instability in global financial markets and the countrys macroeconomic controls confront problems such as how to manage inflation expectations and how to curb the upsurge in asset prices. These factors may increase the instability of cross-border fund flows through such channels as foreign trade, foreign investment, banks, and so forth.

Comprehensive measures are needed for effective control of the risks brought about by the cross-border flow of hot money. Since the beginning of this year, the SAFE has launched a special campaign to struggle against hot money, mainly targeting the penetration of funds via channels with a high degree of openness, such as trade in goods, trade in services, direct investment, and individual transactions. From a long-term perspective, efforts should be made to improve the mechanism for the formation of the RMB exchange rate and to give further play to the fundamental role of the market mechanism to reduce opportunities for arbitrage and speculation by hot money. Efforts should also be made to combat hot money by strengthening collaboration with regulatory departments, keeping a close eye on the major channels of current regulation, and cracking down strongly on various kinds of foreign exchange transactions in violation of the relevant laws and regulations, thereby preventing the inflow of hot money.