Why China Is Becoming The 'Black Hole' Of Global Markets.(Periscope; Financial Astrophysics)(foreign reserves)

Byline: GEORGE WEHRFRITZ

IS CHINA THE FINANCIAL EQUIVALENT OF THE scariest celestial body in the universe? In a new report that crunches Beijing's opaque numbers, analysts at Standard Chartered Bank in Hong Kong argue that the country's foreign reserves "seem to have turned into some kind of massive black hole for the world's liquidity." They calculate that China drew in a staggering $324 billion during the first four months of 2008, of which $119 billion was "unexplained" by either the country's yawning trade surplus or the inflow of legitimate foreign investment. The unexplained part--a sum just shy of Singapore's gross national income last year--is both mysterious and dangerous. The bank's widely respected head of research in China, Stephen Green, says a "hot-money vortex" is forming that could be capable of ravaging China's economy.

Asians know well that hot money (typically invested by high-flying speculators searching the solar system for big, fast returns) can be a highly destabilizing force. When it rushed out of regional economies in the late 1990s, it caused a devastating currency crisis. Today funds surging into China have boosted liquidity, undermined Beijing's efforts to tamp down inflation and contributed to consumer prices that are now running at a 12-year high. Speculators, betting that the yuan will appreciate, are buying it with ...