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Borrowed Dollars Reported to Be Pouring Into China

BEIJING (TheStreet) -- Investors who poured borrowed U.S. dollars into China and falsely claimed the cash as export earnings contributed to a sudden spike in the Chinese government's forex reserves in the second half of 2013, according to an investment bank report.

Forex surged as Chinese companies and other investors used so-called "hot money" tricks to evade Beijing's money controls, said the report released Monday by the Hong Kong branch of the Japanese investment bank Daiwa Securities. Many apparently borrowed dollars at low rates in Hong Kong and parked the money in high-yielding bonds in China.

"Money is being sucked into China, mostly because of higher yields" offered on Chinese government and corporate bonds, and on wealth-management investment products sold by Chinese banks, the report said.

The People's Bank of China, the country's central bank, reported a US$ 160 billion increase in forex reserves in the fourth quarter alone, ending the year with US$ 3.28 trillion on hand. The increase for the whole second half of last year was US$ 323 billion, compared with a US$ 185 billion rise in the first half of 2013 and a US$ 130 billion increase for the entire year of 2012.

The Daiwa report estimated about US$ 256 billion of the new foreign currency flowing into forex reserves through China's currency control system between June and December was "chasing higher yields" offered by mainland investment products, like bonds. To get around controls "many companies most likely falsified trade transactions in order to bring in money from outside," the report said.

Some of those dollar-attracting investment products are particularly risky, the report said, and may be tied to bonds or other instruments issued in recent years by heavily indebted local governments across China.

"Higher yields also mean a higher credit-risk premium, and this premium is being underpriced because cheap dollars are still up for grabs," the report warned. "When credit becomes as overstretched as it is now, a full-blown crisis is only a matter of time, in our view."

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Eric Johnson is a journalist with 30+ years of experience. Chinese business-financial news has been his mainstay since 2006.

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