China will start regular annual checks of banks' foreign exchange operations to make sure they observe relevant rules, the foreign exchange regulator said on Friday.

The move is a concrete step towards implementing the country's newly approved foreign exchange rules that were set earlier this month and curbs cross-border speculative capital flows, analysts said.

The checks will cover the banks' whole-year operation to see if they abide by foreign exchange management rules, the State Administration of Foreign Exchange (SAFE) said in a statement after releasing a new management method. Banks will be required to report relevant data to regulators, which will also examine their internal risk control system.

Banks that are found to have problems will be informed and required to address their wrongdoings, the statement said, without going into further detail of the repercussions for offending organizations.

The new method will come into effect from next month.

SAFE said that banks have cooperated in implementing relevant foreign exchange rules and played an "active" role in maintaining a stable financial environment and strengthening cross-border capital flow management.

But analysts have expressed deep concerns that large amounts of speculative capital have swarmed into the country, which poses a serious challenge to its financial regulations. People generally estimate that the "hot money", as speculative capital in known, could amount to several hundred billion dollars, with the boldest estimation standing at US$1.75 trillion, almost at par with China's foreign exchange reserves.

Some of the capital has managed to flow in through false trade settlement and some through foreign direct investment, analysts said.

The country revised the 11-year old foreign exchange management regulation early this month to strengthen control of speculative capital influx. A month earlier, regulators required that it would be mandatory for traders to park their export receipts in temporary verification accounts till they are cleared as genuine trade revenue.

"The next step should be to strengthen monitoring of bank operations to prevent foreign investment from being used as speculative capital," Zhang Ming, an economist from the Chinese Academy of Social Sciences, said in a previous interview. "Some of the 'hot money' may come in the form of foreign investment."

The latest rule, according to Sun Lijian, an economist at Fudan University, is to engage banks in the country's fight against speculative capital after regulators issued the monitoring rules targeted at trade companies in July.

"Some banks may fail to report dubious large-scale foreign exchange settlements so that they can continue to profit from such deals," he said. "The new rule would strengthen management of such operation."

(China Daily August 30, 2008)