The Hindu Business Line : Chinese confession

IN FINANCIAL CIRCLES there is a myth that the dollars flowing into China bear no taint, as the Chinese can do no wrong. But the Chinese central bank has dashed this touching faith by admitting that half of the foreign capital flowing into China from offshore financial centres is dollar-washed local money. In the world of high finance, this is called round-tripping. The Chinese central bank said that many businesses and sections of corrupt officials had taken funds to Virgin Islands and sundry other financial laundries before bringing them back as foreign capital. In 2004, a third of dollar flows had come from these hot-spots, with the Chinese Government not able to do much. Excess dollars have been pushing up the value of yuan, which was recently unplugged from the dollar and connected to the fate of a basket of currencies.

The Chinese admission is old hat for Indian business. Managers of the Indian economy — especially the Reserve Bank of India, which is trying to juggle with dollar bounties — should be smirking at the honest confession by one of its own — the Chinese central bank. There is in India a view (held privately) that a sizable part of the recent dollar inflows into the country is Indian money (of businesses and politicians) coming back from financial havens. It is a logical return of the Prodigal Son. It may be useful to remind ourselves that Indians built a pile in Swiss banks when foreign exchange controls were rigid and a common way of beating the system was to under-invoice exports and over-invoice imports. That mindset remains. The RBI has banned inflows OCB (Overseas Commercial Borrowing) inflows prompting financial players to think up newer routes to enter the country. The RBI and the Securities and Exchange Board of India are keen to get at the sources of the dollars; quite a futile exercise it will turn out as financial flows rarely leave footprints. Can anyone stop or trace the owners of participatory notes? Some believe (again privately) that there will be a dollar glut if India opts for full convertibility as local interest rates and the bourses offer better returns. It is hard to believe that the recent mark-up in interest rates by the US Federal Reserve will impact dollar inflows when parking funds in reverse repo can fetch 5 per cent.

When the East Asian currency crisis broke, the RBI came down hard on trading in the forex market to manage the float of the rupee against the dollar; many think it was the wisest move. Speaking on the episode, the former RBI Governor, Mr Bimal Jalan, felt that, "the lesson from the Mexican or East Asian episodes is not an argument against capital flows or capital account convertibility. It is about careful and judicious handling of such flows and about the pace of movement towards capital account liberalisation for residents. It is also about building domestic safety nets, for example, by keeping the level of liquid foreign exchange reserves high in relation to short-term external obligations." What most do not want to admit is that funds do not run scared from a performing economy with featherweight controls. Evidence: The famed hawala quotes for the dollar are not to be heard since forex reserves in India started climbing.

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