The central bank, which has kept interest rates high to offset lax fiscal policy, is in a policy bind: even higher rates might attract a destabilising amount of speculative capital, while lower rates would fuel domestic demand and imports, pushing the current-account deficit higher.
"To me, many of these projects are a result of easy access to capital and a combination of wishful thinking and speculative behavior rather than rational business calculations, " said Victor Teo, assistant professor at the University of Hong Kong.
A-share volatility is exacerbated by erratic inflows of speculative capital.
That would allow a bit more flexibility against the dollar and help to discourage speculative capital inflows.
Opening up the capital account would attract a lot of hot, speculative money, just as it did in the rest of Asia in the early 1990s.
ECONOMIST: Will China float the yuan, revalue it up a bit, or neither?
Although the data show a rise in the speculative long positions overall, analysts at Barclays Capital warn that since the cutoff date for the information was June 5, before the market sold off on Thursday.
FORBES: FOCUS: Speculative Buyers Mostly Return To Precious Metals -CFTC
Barclays Capital said the rise in the speculative position comes on a combination of new longs and short covering activity.
FORBES: FOCUS: Speculators Mostly Return As Buyers To Metals -- CFTC Data
The Volcker Rule prohibits banks from owning a division (like prop trading) that makes speculative bets with the banks own capital.
The snag is that a small revaluation is likely to increase expectations of another future appreciation, attracting yet more speculative capital and swelling foreign reserves further.
The strongest argument for a revaluation now is not that the yuan is undervalued, but that an adjustment would halt speculative capital inflows and so mop up the excess liquidity.
Commodity Futures Trading Commission data showed speculative buying, in one of its weekly commitment of traders reports, was at a record level and Barclays Capital said gold ETF holdings are at a record.
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