Empirical Study On The Hot Money Scale, Its Driving Forces And Effects

The further development of financial liberalization offers great opportunities for the flows of hot money. In the recent years, China’s capital environment has also become a hotbed that attracting large inflows of hot money. The large-scale stream of hot money with the intent of chasing short-term gains is often detrimental to a country’s real economy and capital markets. It might even evoke a severe financial crisis in the case of capital flight. This paper will be concerned about the hot money in China.Firstly, this paper defines the concept of hot money. Then based on the Balance of Payments (BoP), it sorts the channels of hot money inflow.Then the paper calculates the scale of hot money in China utilizing both the direct and indirect methodologies. It recalculates the scale of hot money in China based on the adjusted indirect method in order to get more precise results. The recalculation is based on the channels of hot money inflow, including the adjustments of increase in international reserves, the estimate of scale in trade account and FDI account, and in the underground banking as well.On the basis of estimate of scale of hot money, this paper analyzes the driving forces of hot money’s flows, namely exchange rate difference yield, interest rate difference yield, asset price yield and economic growth yield. The paper then establishes a vector autoregression (VAR) model using 2000-2012 data to conduct empirical study. The research suggests that the exchange rate difference yield is the most important factor affecting the flow of hot money, and the stronger the expectation of RMB appreciation, the more hot money inflows.Although the empirical study shows that asset price yield is not an important driving factor, the huge scale of hot money inflows may generate asset price bubbles. This paper is concerned about the influence path of hot money on the stock prices and real estate prices. The consociation equation set model shows that there exists significant positive correlation between the stock prices and hot money inflows, but there is no significant correlation between real estate prices and hot money inflows.Finally, this paper comes up with policy proposals featuring the combination of dredge and block based on the channels and driving forces of hot money inflows.