China crackdown on hot money

China has stepped up their clampdown on hot money or illegal international capital bettting on specualtive gains. The foreign exchange regulator said that since an initiative launched last November, more than 5,775 export firms have been put under close scrutiny for being suspected of dealing in speculative capital through disguised trade flows.
I applaud the risk-prevention move by the Chinese regulator. Hot money has been a significant factor for the continued fast growth of Chinese foreign exchange reserve and it could be a timed bomb to Chinese finance system. The excessive inflow of hot money would force the Central Bank of China to buy it and sell the Chinese curreny to keep the exchange rate stable. This could not only lead to the surplus of liquidity and contributes to the overheating of the economy, but also contribute to a vicious cycle, because the continued purchase of foreign currency by Central Bank could do nothing but expanding the already massive reserve. The expectation for appreciation of Chinese currency will therefore be increased again, which makes China more attractive to the speculative short-term capital.
So China need to prevent such a vicious cycle from taking place. A premature attack on the hot money would strengthen Chinese defense against financial risk and economic instability.