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The following article was published in our article directory on November 29, 2010.
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International Financial Speculative Capital Sources and Movement Law

Article Category: Business

Author Name: Amanda xzh

In recent years, large international financial speculative capital and super shadow international financial institutions, in order to achieve speculative arbitrage, high-speed run through the network of international financial transactions, the multinational financial speculation. This shadow financial system and avoid the sovereign state through various forms of financial regulation, not only a significant impact on the international financial order, but also likely to cause international financial crisis at the same time would seriously endanger the country's financial sovereignty.

In fact, as early as during the two world wars, international capital had become dramatic events. 1926 | 1928, because of the market generally expected a possible revaluation of the French franc, France became the large inflow of foreign capital competing goals. 40 years of the 20th century, when the Soviet Union, once the United States to meet in order to prevent the "cold war" to freeze its U.S. dollar reserves, while its U.S. dollar reserves with the Bank of France until the 60's the United States controls the export of capital to start when aware of this the great potential of hot money. To the 20th century, European countries have 70 years of 3,500 billion U.S. dollars "hot money" into the system. 80 years since the 20th century, the Western developed countries, the prevalence of free competition and financial liberalization, countries to relax or abolish the control of interest rates and financial services, generally a low interest rate policy, thus contributing to a large number of idle capital into the international financial market speculation. In the early 20th century, after the Cold War 90 countries around the world turn to develop their economies, resulting in international capital supply and demand imbalance. From the supply side, the prevalence of developed market economies of capital surplus, but because the Western world economic recession, shrinking investment opportunities, resulting in a large number of "hot money" anxious to seek and increase the value of the place.

In recent years, international short-term capital movements has several noteworthy trends: first, a large number of international capital flows to developing countries, mainly Asian and Latin American countries. The World Bank has just released a report in 2010, remittance flows to developing countries is expected to 325 billion U.S. dollars, more than 307 billion U.S. dollars in 2009 increased 6%, of which China is one of the largest recipients of remittances. Second, the composition of capital flows to developing countries or the form of a great change compared with the past. Mainly in the rapid increase in the proportion of portfolio investment, in total more than direct investment. Third, the rapid development of institutional investors. Today, the international "hot money" is no longer "stragglers", but a veritable "powerful group", diversification of investment funds to institutional portfolios as the representative of the world financial market development is an important development trend.

Government control of the international financial speculative capital

Currently, only China, South Korea, Thailand, Singapore, Malaysia, Indonesia and other countries have adopted the intervention measures of international speculative capital inflows. In the U.S. implementation of the new quantitative easing monetary policy, international "hot money" hit out of the situation, the significance of government regulation in the following aspects: First, to maintain the country's political and economic sovereignty. Control the national money supply and maintain stability of the currency is a sovereign national government the most basic economic functions. By international cross-border flows of speculative capital in the formation of a new international financial order, the problems exposed by weakened the sovereignty of national governments to control their ability to run their economies, but also may affect the host country's political stability. For emerging market and developing countries, as the market economy system is not fully established in the domestic economic and financial system to withstand the impact of short-term capital out of a large number of conditions are not available, if allowed a large number of international speculative capital inflows, the economic system will inevitably smooth transition and steady growth of the national economy have a huge impact, so that the country's political and economic sovereignty are being seriously challenged. Second, the protection and healthy development of China national economy. Emerging markets and developing countries is very weak national industrial base, the modernization of the national economy is a gradual process, to obtain short-term interests as the main purpose of international speculative capital inflows, although the demand for funds can temporarily solve the problem, but the overall and long term more harm than good, unbalanced economic structure will be further distorted. Government, through the international "hot money" in the strict control, can play both full use of foreign investment, while protecting the national economy.

From international experience, government control of international financial speculative capital can be divided into direct control and indirect control. Approach requires the direct control of the government monetary authorities to take effective measures to strengthen the international short-term capital into and out of their control. There are two direct means of control, one increases the cost of short-term capital into; the second is the number of control. For the former the government can impose a "Tobin tax rates balanced" approach, requiring foreign investors to pay tax on interest on investments of the Fund, increasing the cost of short-term capital to enter. The latter can by setting the limit of bank loans, the minimum reserve requirements for foreign borrowing and foreign direct investment limits, etc. the number of short-term capital inflows control. However, due to economic globalization and financial integration process, the highly developed modern financial network, a government wants complete control of short-term capital movements is extremely difficult, especially when most of the world in emerging markets and developing countries to develop their own economy, increasing competition for foreign direct control of the country will have serious loss of credibility, leading to large capital flows to competitors, on the implementation of national economic development, a serious obstacle to financing strategy, it can only play a short-term direct control role .

Most countries pay more attention to use of indirect means to control the international speculative capital, the adjustment of international short-term speculative capital movements indirect means of control include: central bank intervention in the foreign exchange market, fiscal policy adjustment, the liberalization of trade and the export of capital, interest rate market and so on. In the case of capital inflows, the central bank to support the nominal interest rate stability, and can take in and the policy of non-intervention in the foreign exchange market and the operation. And in interventions, including open market operations, the central bank to buy the additional liquidity, to avoid the expansion of domestic aggregate demand and inflation. Raise the deposit reserve ratio, money multiplier can be reduced, thereby reducing the foreign exchange market intervention by the central bank monetary expansion brought about, such as raising the reserve ratio of commercial banks, on bank loans given to control. However, the policies and interventions is a cost, and in policy often leads to the central bank's quasi-fiscal deficits, high rates of commercial bank reserves and the size of loans more stringent control, and further led to the financial intermediation costs and non-regulatory the rampant underground financial activities. Alternatives to resolve these contradictions is the central bank can implement a non-neutral financial policy that the implementation of interest rate market, the Government may allow by lowering interest rates, increasing the demand for money, but the government must have an effective financial stabilization program to reduce the amount of the currency impact on inflation. While in the case of large inflows of foreign capital, should speed up trade reform, promote trade liberalization. Short term, to reduce the tariff increase in import demand will weaken the current account surplus, slow the rate of accumulation of foreign reserves; the long run, trade liberalization can improve the efficiency of the domestic economy, improving their business management, and enhance their international competitiveness. The face of a large number of short-term capital inflows, fiscal policy impact of its macroeconomic effects and uses of funds (the structure of fiscal expenditure effect) was most favored by the emerging markets and developing countries, the first effect is the mixture of economic policy as part of fiscal policies are conducive to offset the purchase of foreign exchange caused by the central bank increases the money supply lead to inflationary pressures. The second effect is to maintain a high real exchange rate, mainly through private spending will shift the form of government spending. However, in practice, to adjust fiscal policy to deal with the short-term capital inflows have significant limitations, in fact, to adjust fiscal policy really are not many countries.

As a government control of international speculative capital inflows appropriate measures, according to the host country require the specific national conditions and development of the financial system, such as the size of capital inflows, structure, availability and flexibility of policy instruments, as well as host of domestic financial markets developmental level, and so on. In addition, a variety of policy instruments and policies with the use of a reasonable order of the optimization, can bring some short-term capital inflows risks are mitigated. At the same time the beginning of capital inflows can be taken in and of "freeze" policy, and then gradually into the currency of the capital, while an appropriate appreciation of the currency. Requirements of the international speculative capital moving very rapidly, the Government to maintain adequate foreign exchange reserves and to allow greater exchange rate flexibility to help reduce the negative effects of short-term capital inflows.

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