BOAO, Hainan - China faces speculative capital inflows in the next couple of years and should be clearly aware of the potential shock when the capital flees, top executives warned.

"Inflows of hot money will be a long-term constant phenomenon in the Chinese economy and other emerging markets, which are enjoying rapid growth and are likely to see their currencies appreciate at a faster pace," said Jiang Jianqing, chairman of the Industrial and Commercial Bank of China, the world's biggest bank by market value.

Further extension of capital markets and prudent regulation of hot money - speculative investments that flow between countries seeking a profit on interest or exchange rates - are needed to avoid a great shock when speculative capital flows out, Jiang said at a discussion panel at the Boao Forum for Asia on Friday.

"The sudden withdrawal of hot money on a large scale will usually produce a great shock on the economy, as we have already witnessed in some Asian and Latin American countries," he said.

He welcomed a new guideline on capital control by the International Monetary Fund (IMF) that encourages emerging markets to take measures to control speculative capital inflows under certain conditions.

The IMF proposed the guideline earlier this month, recognizing short-term capital control as a tool to manage hot-money inflows, but distinguishing it from long-term barriers for foreign capital.

China's short-term capital inflows have accelerated since the third quarter of last year, arousing widespread concern over their negative effects on the world's second-largest economy. Foreign exchange reserves increased by $197 billion in the first quarter to top $3 trillion for the first time, up 24 percent from the previous year.

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In the past few years, China has witnessed an average annual inflow of $25 billion in hot money. Last year, it attracted $35.5 billion, up 7.6 percent from 2009, according to the State Administration of Foreign Exchange.

Jiang said the percentage is not big, but already above the international warning line of 6 percent. "And given the large scale of hot money, we must keep a sober mind on the issue."

Liu Erhfei, country executive of Bank of America Merrill Lynch in China, said the increase of speculative capital inflows is connected with monetary easing policies in the US and Europe, but these exert less pressure on China than other emerging markets as the country has adopted strict capital control measures.

"China should gradually reduce capital control and instead set up a higher wall to realize its goal of becoming a world financial center," said Liu. "If it relies on restrictions to fend off the influence of hot money, it means that the economy is still not really as strong as it seems to be."

But Jiang said the key to dealing with potential risks of hot money inflows is to make capital markets big and extensive enough to reduce the influence of speculative capital withdrawal.