China is toughening the enforcement of its capital controls

China is toughening the enforcement of its capital controls, announcing a new system for monitoring funds brought into the country by exporters, as it seeks to control the surging fund inflows that are complicating the government's fight against inflation. The State Administration of Foreign Exchange said in a statement on its Web site that exporters will have to park their revenue from overseas sales in a special bank account for auditing before they exchange it into local currency. The new system, which takes effect July 14, will verify that the invoices match up with genuine transactions and aren't being inflated to bring additional foreign currency into China. The new measures are being announced in a climate of growing official concern over inflows of so-called hot money. China's foreign-exchange reserves grew by $74.5 billion in April and $40.3 billion in May, reaching a total of $1.797 trillion. With the Chinese currency appreciating against the U.S. dollar, and expected to continue doing so for the foreseeable future, many economists believe those inflows are being swelled by speculators seeking to profit from the currency gains. Chinese officials worry that such speculative inflows could be destabilizing. While capital controls severely restrict most standard channels for portfolio investment in China, trade flows are extremely large and less-strictly monitored. Economists have long believed that exporters often pad legitimate transactions to move money into and out of the country. This troubles authorities because large inflows of foreign exchange increase the amount of cash in the local banking system, adding to inflationary pressures at a time when prices are rising by more than 7% annually.