* November exports post suspiciously strong rise* Economist suspect fake trade transactions enabling hot money flows* Speculators attracted both by rally in yuan and record-high bond yields* Beijing's desire to hold down yuan while raising interest rates a dilemma - economistBy Pete SweeneySHANGHAI, Dec 11 China is seeing a resurgence of "hot money" seeking to cash in on the rallying yuan and record-high interest rates, contributing to distortions in its trade data as speculators move money through regulatory loopholes. The return of distorted trade figures is unlikely to be welcomed by the People's Bank of China (PBOC), although it is facing a dilemma. It wants to keep the yuan from appreciating too quickly but at the same time has pledged to gradually free up its grip on the currency to encourage its global use. November exports rose 12.7 percent on-year, blowing past a Reuters poll that predicted 7.1 percent growth, but many analysts suspect the performance was inflated by speculators moving money into the country through fake trade transactions. Nomura economist Zhang Zhiwei pointed out in an email to clients that China's export growth far exceeded that of its Asian neighbours in November, which is unusual. At the same time, imports grew less than expected and factory output slightly underperformed expectations; all three together form a combination analysts find highly suspicious."The Hong Kong number is suspicious," said Wei Yao, economist with Societe Generale in Hong Kong. "The month-on-month increase is 28 percent, the strongest since April."Hong Kong's economic integration and close proximity with China has made it a favoured target for fake trade in the past; companies can cheaply ship lightweight products to Hong Kong, sell them at elevated prices, then use the resulting foreign currency into yuan in China, thus evading controls on investment flows by dressing them up as trade receipts.
Beijing found the November data suspicious, too, and regulators announced over the weekend they will crack down on banks' and companies' use of foreign currency for trade finance by ensuring that trade deals are authentic and by monitoring for unusual cross-border cash flows. While official capital flow data is not yet available for November, hot money inflows had begun to surge again in September and October, Reuters estimates show, with $24 billion flowing into the country in October, up from $16 billion in September. VARIATION ON A THEME The PBOC's first option of choice is using administrative crackdowns to close the loopholes, but that's a challenge because Chinese companies are adept at finding new ones. Alternatively, it can let the market dictate the yuan's exchange rate, which would introduce more risk and presumably discourage some speculators, but would also risk a destabilising rise in the currency that could hurt exports. The speculative inflows are similar to a phenomenon in March that saw Chinese exports post a suspicious spike. It resulted in a crackdown by Beijing on hot money inflows and currency speculation.
In March the primary purpose of the speculation was to cash in on the rallying yuan, but this time analysts say there are more factors at play. The currency has hit record highs and is up 2.6 percent this year, already in excess of traders' expectations. Still, while its appreciation is an obvious factor, economists point out that interest rate liberalisation in China, combined with policy tightening, also has made yuan assets more attractive. Many Chinese bonds are now paying out record yields."We are concerned that rising RMB/USD and rising bond yields could once again entice capital inflows via over-reporting of exports," Lu Ting and Sylvia Sheng of Bank of America Merrill Lynch wrote in a note to clients this week. At the same time, depressed yields for dollar-denominated assets, thanks to continued easing by the U.S. Federal Reserve, are only encouraging investors both inside and outside of China to hold yuan.
NO ALTERNATIVE The problem for policymakers is that reforms to domestic interest rates that have produced such attractive yields have not been accompanied by reforms to the foreign exchange market, which remains -- despite promises of imminent liberalisation -- tightly controlled. Forex traders told Reuters that the PBOC deliberately held back the yuan spot rate for most of November by instructing major state-owned banks to buy up dollars for yuan. This appears to have convinced companies both onshore and in Hong Kong to scramble for yuan to bet that further appreciation would ensue once the bank let the market go, creating a positive feedback cycle. And in fact that is precisely what happened this week. On Friday, traders said the central bank had signalled a fresh round of appreciation, both by lifting its official guidance rate and by instructing its proxy banks to stop buying dollars. The currency went on to set a new record of 6.0703 per dollar on Tuesday. This situation, in which the PBOC attempts to keep interest rates high while simultaneously holding back the yuan from strengthening too quickly, is an expensive proposition as it requires the bank to manually sop up all the money flowing into China to keep it from pushing the yuan up, which in turn only adds to China's massive pile of low-yielding dollar reserves. Otherwise the flood of inflows would add to the money supply, depressing interest rates."It's a dilemma. I don't see a clear solution," said Wei of Societe Generale."The thing is, China cannot afford a very accommodative monetary policy anymore; it's too dangerous in terms of systemic risk. On the other hand, if the PBOC doesn't want to maintain complete capital controls, they have to accept appreciation pressure."
* $69.7 mln for Norwegian lender's notes* Minor event still yields "pound of flesh" - Ohio State professor* Funds trade group calls case a red herringBy Ross KerberBOSTON, July 2 Oslo may seem far removed from Chicago, but the downgrade of a Norwegian lender's debt rating last fall led U.S.-based Northern Trust Corp to step in with $69.7 million of support for two of its money market funds. The unusual backstop - shown in filings and which the Chicago trust bank acknowledged to has become a flashpoint in the debate over the future of the $2.5 trillion U.S. money fund industry. At a time when regulators are urging tighter rules for the funds, some specialists say the support shows how even developments in distant lands can affect fund companies."This seems to be a really small event, and it's still extracting its pound of flesh," said Rene Stulz, an Ohio State University professor who has led calls for new rules such as requiring money funds to build up their reserves. Northern Trust executives would not comment on the policy debate, but sent a statement to Reuters describing the support as a routine decision after Moody's Investors Service downgraded the Norwegian lender, Eksportfinans, in November when it lost its role as sole operator of an export loan system. Eksportfinans notes were held by two money funds that Moody's would have downgraded as well, Northern Trust said, had it not bought the paper. Northern Trust said the notes paid off at par, meaning it did not suffer losses. Others say even though the notes paid off, the support shows how the fund sponsor took on some extra cost and risk.
"If Northern at the time of the transaction thought they were not subsidizing the funds, (then) I have a lot of bonds I would like to sell (to) them," said Kenneth French, director of investment strategy at Dimensional Fund Advisors and a Dartmouth College finance professor who has worked with Stulz on matters aside from money fund policy. A fund industry trade group said Eksportfinans is a special case that should not figure in the money fund regulatory debate. Officials at the U.S. Securities and Exchange Commission declined to discuss specific funds. Northern Trust is one of the largest custody banks. Its money funds are among many that have looked to hold securities from institutions in Northern Europe amid debt concerns further south. LATEST CHALLENGE
The shift away from countries like Greece and Italy is the latest challenge for money funds, which play a central economic role as major buyers of commercial paper and other instruments. During the financial crisis one well-known fund failed to maintain the $1 per share net asset value that investors typically expect, dragged down by its holdings in the collapsed investment bank Lehman Brothers. Many other funds struggled to avoid "breaking the buck," an industry term used to describe falling below $1 a share. New rules in 2010 made the funds more liquid and transparent. Some like U.S. Securities and Exchange Commission Chairman Mary Schapiro still want more controls. Draft SEC rule changes would give funds two options: allow their net asset values to vary from $1, or adopt capital buffers and restrictions on some withdrawals. Fund executives worry the changes could drive away investors, and note the funds managed through the 2011 debt limit debate under the current rules. A point of contention is how much support the funds have needed in the past. Schapiro told Congress on June 21 her staff found more than 300 cases of funds getting support from their sponsors since the 1970s. Fund executives have lashed back. In a blog post Sean Collins, analyst for the fund industry trade group the Investment Company Institute, called the figure of 300 "highly misleading" and contrasted it with a study by Moody's Investors Service. It found at least 36 cases of support for U.S. funds from 2007 to 2009.
FACING A DOWNGRADE Support can come in other forms than cash, Collins wrote, and it does not necessarily mean a fund is in danger of breaking the buck. For instance, a sponsor may just wish to maintain a credit rating. Since the 2010 reforms his group knows of just one case when support was required, the one involving Eksportfinans. Some U.S. funds held Eksportfinans notes around the time like First American Prime Obligations Fund, run by U.S. Bancorp . A spokesman said the notes either matured or were sold, and that no support was needed. A February 3 SEC filing states Eksportfinans notes also were held by two Northern Trust funds, Diversified Assets Portfolio and Prime Obligations Portfolio. On November 25 they sold the notes to their parent for $50.3 million and $19.4 million, respectively. Northern Trust's statement said the sales stemmed from Moody's plans to downgrade funds that held the notes."While Northern Trust acknowledged the Moody's downgrade, our credit research team believed that Eksportfinans had strong credit and would repay its maturing debt," the statement said. Other funds not rated by Moody's continued to hold the notes, it said, and both sets of notes paid off at par in 2012. The ICI's Collins did not name Northern Trust. But he called the Eksportfinans situation "a red herring" as far as the policy debate over money funds, since the challenges funds faced around its notes were different than the broader euro zone debt concerns that fund critics have raised. Also funds faced no danger of breaking the dollar, he wrote. Henry Shilling, the Moody's analyst who authored the report cited by Collins, said the support to the Northern Trust funds showed how money funds remain exposed to what he called "idiosyncratic events" that crop up. A problem in money funds, he said, is that they can have little room to absorb a credit event while maintaining their $1 per share net asset value. "That's a vulnerability in their construction," he said.