Fears that speculative inflows of “hot money” could destabilise the Chinese economy have long pre-occupied policymakers in Beijing. Now that the renminbi has been cut loose from its peg to the US dollar, these worries are back with a vengeance.
The problem for policymakers is that most investors believe that the renminbi is significantly undervalued against the dollar – some even estimate by almost as much as 50 per cent. So speculating on a revaluation is widely seen as a one-way bet.
That raises the prospect that speculative capital will flood into China, potentially crimping the central bank's control over monetary policy and fuelling asset bubbles and inflation.
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