The control freaks in Zhongnanhai are doing an effective job of keeping unwanted foreign detritus out of Beijing this summer. International students have been told to leave, thousands of foreigners working on tourist visas are being forced home in the hope of securing a return visa and residents of diplomatic compounds are under pressure to register at local police stations or risk heavy fines.
The mandarins are even doing their best to prevent international tourists from spending their cash during the Olympics: It is now impossible to secure a tourist visa without having pre-booked a hotel in Beijing, which are uniformly charging extortionate prices for the month of August.
You have family or friends in Beijing? Forget it – you’re not allowed to stay with them.
But perhaps the government is being cleverer than people think. Bizarrely, despite previous hopes that the games would bring a tourist bonanza, they may not want your tourist dollars after all.
China’s central bank is currently engaged in a battle to squeeze domestic liquidity, which many economists blame for helping drive inflation to 12-year highs. The yuan has been allowed to appreciate at its fastest rate since the US dollar peg ended in 2005, while commercial lenders are under orders to lend less and keep more cash in reserve.
Record capital inflows are blamed for clogging up the overworked monetary system and a sizeable injection of tourist cash courtesy of the Olympic Games could just worsen the situation.
Foreign capital inflows surged by US$229 billion in the first four months of the year, including a record US$74.46 billion in April alone. It is now certain that China’s foreign exchange reserves will break the US$2 trillion barrier well before the year is out. According to economic theorists, a country should have a foreign currency stockpile large enough to cover several months of imports. China’s stash is far in excess of any economic need.
Strangely, the surge in foreign capital entering the economy has occurred despite slowing exports, the traditional source of most inflows. The sum of April’s trade surplus and foreign direct investment (FDI) inflows came to US$24.3 billion, leaving a massive US$50.16 billion hole in the accounts.
Although economists say that a chunk of this can be put down to valuation changes affecting non-dollar holdings and growing onshore dollar lending, they reckon that as much as US$40 billion flowed in from abroad – mostly betting on the appreciation of the yuan or taking advantage of the mainland’s higher interest rates.
Hot money, it seems, is back with a vengeance. But, aside from discouraging tourist spending, what can the central bank do?
The prosaic option would be to re-tighten the capital account, placing further restrictions on FDI and on the conversion of export payments. Beijing is understandably reluctant to do this just as it is preparing to invest more of its own cash abroad.
Alternatively, the central bank could halt or even reverse the appreciation of the yuan to dissuade speculators. That seems impossible because a stronger yuan is needed to help reduce the trade surplus and dampen inflation. With oil prices hitting new highs, a stronger currency also gives Beijing more buying power on international markets.
It is a rare thing to conclude that one’s bank balance is simply too large – but that is precisely Beijing’s problem. Here’s to a tourist-free Olympics!