BEIJING (MNI) - Flows of capital into China are set to rise this year on the back of yuan appreciation expectations and interest rate differentials between the yuan and other foreign currencies, State Administration of Foreign Exchange (SAFE) director Yi Gang was quoted as saying Friday.

The China Securities Journal cited Yi as noting that global central banks, including those in the U.S. Europe and Britain, are all pursuing near-zero interest policies, meaning that abitrage trading is dominant in the market.

"China has relatively higher rates and yuan appreciation expectations are stronger...we have bigger pressure from abnormal capital inflows," said Yi, who still holds a vice-governorship at the People's Bank of China.

Yi noted the lure of Chinese asset prices and warned that 2010's balance of payments surplus could exceed that of 2009.

China deliberately maintained a gap between domestic interbank market rates and their international counterparts immediately prior to and after the 2005 yuan revaluation to deter speculative "hot money" inflows. But officials have also privately dismissed the impact of this strategy given the outsized gains available in Chinese asset markets.

Guan Tao, deputy-director of the international payments department of SAFE, said last month that China will tighten its defenses against hot money inflows because of the "impossible trinity" -- the theory that a country cannot have a fixed exchange rate, free movement of capital and monetary policy independence at the same time.

China's foreign exchange reserves surged a record $453.1 billion to $2.399 trillion in 2009 -- including a $126.56 billion increase in the fourth quarter -- reaffirming the country's position as the world's biggest holder of hard currency.

Stone & McCarthy Research Associates in Beijing estimated total hot money inflows of around $105 billion in 2009.

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