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China acts to curb 'hot money' inflows, yuan speculation

China's decision to cut its short-term foreign debt quota was aimed at preventing irregular cross-border fund inflows and curbing speculative money inflows, analysts said Friday.

The government cut its short-term external debt quota by 1.5 percent for 2010 compared with the 2009, the State Administration of Foreign Exchange (SAFE) said in a statement Thursday.

The ratified short-term external debt quotas for domestic financial institutions in 2010 totaled 32.4 billion U.S. dollars, SAFE said.

Zhang Zhizhou, analyst with CEBM Group in Beijing, said the move curbs "hot money" inflows as China is now under pressure from growing inflows of cross-border funds which have increased liquidity in a market already flooded with banks loans.

He said the cut might signal a policy shift in the exchange rate.

An unknown amount of speculative capital, or "hot money," enters China every year disguised as trade and investment. The capital is betting on an appreciation of the yuan, China's currency, and a hike in assets prices.

Peng Wensheng, chief economist of Barclays Capital, echoed Zhang's view, saying the government hopes the move will pave the way for a more flexible yuan exchange-rate mechanism.

China's outstanding external debt totalled 428.6 billion U.S. dollars at the end of 2009, up 14.4 percent from a year earlier.

Capital flows into and out of China for purposes other than payments related to exports and imports are strictly controlled by SAFE.

SAFE manages China's 2.4471 trillion U.S. dollars in foreign exchange reserves.