June 29, 2007 (LPAC)--China's State Administration of Foreign Exchange (SAFE) has cracked down on 29 banks, domestic and foreign, accusing them of bringing "hot money" into China. "Speculative capital has flown into the country under the guise of trade and investment. The capital inflows have, to some extent, affected the domestic capital macro-economic situation and a healthy economic development," said SAFE Deputy head Deng Xianhong, reported by the China Daily .

Among the foreign banks named are the HSBC, Standard Chartered, and the Citigroup. Among the domestic banks, branches of the state-owned Bank of China, the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications and China Construction Bank have been identified to be disciplined.

According to the SAFE authorities, the speculators are targeting the rising Chinese currency, yuan, which has gone up by 8 per cent since China widened its fixed trading band in July 2005. One way of getting the speculative flow into China is via short-term foreign borrowings, which went up 16 percent from end 2005 to end 2006. By end 2006, some 57 per cent of foreign debt was short-term, up from 55.8 percent in June 30, 2006.

Already, the amount of speculative funds in China has ballooned to $300 billion, which "will fan speculative sentiment, but once it flows out abruptly, it will deal a blow to the financial system," said Zhuang Jian, a senior economist with the Asian Development Bank.