CAPITAL INFLOW AND HOT MONEY Dianqing Xu China Center of Economic Research.
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CAPITAL INFLOW AND HOT MONEY Dianqing Xu China Center of Economic Research
Capital inflow At the end of May, 2008 ， foreign currency reservation in China 1682.2Billion USD ， Growth rate 39.94% 。 During last 4 years ， Foreign currency reservation increased 1100 billion USD 。 Around 1070 billion RMB have been used for observe capital inflow. M2 in First quarter 2008: 1969.8 billion ，
Hot Money Capital inflow does not equal to hot money. Basic characteristics of hot money : First, time, short term Second, space, high liquated
Area of hot money ： （ 1 ） low transaction cost ， （ 2 ） High liquidity ， （ 3 ） Large amount ， （ 4 ） High variation of price Stock market and real asset market.
Investment and speculation Financial crisis and capital flight. Capital flight usually start from domestic enterprises. It is impossible to tell investment and speculation before financial crisis.
Reasons of capital inflow First ， Appreciation of RMB 。 Totally appreciated 18.5%. Second, Interest rate At May of 2008, Interest rate was only 2% in USA but 4.14% in China.
Third, High economic growth rate in China, Opportunities for investment in domestic market, High demand on capital investment. Forth, High uncertainty in financial market in the world.
Current situation of economy in China still quite good, No domestic enterprises run away from China. It is not reasonable to identify current capital inflow as hot money because they are not short term and no sign to flow out.
Impacts of capital inflow Where are the capital? （ 1 ） Consumption ， （ 2 ） Hold in cash （ 3 ） Deposit into banks （ 4 ） Housing market （ 5 ） Stock market （ 6 ） Bond and future market and foreign exchange market
Consumption It may push high inflation rate If capital inflow into consumer good market. However, there was no significant effect on consumer market. Negative interest rate Lost purchasing power if people deposit money into bank
The bond market is very small in size. Almost no future market and foreign exchange market. If huge amount of capital insert into stock market it may create high variation. If huge amount of capital insert into housing market it may push housing price high.
The problem is capital flight in short term. No dangerous when capital inflow in China. The lessens in Asian financial crisis in 1997 It is impotent to control the channel of capital flight (1) Conversable currency (2) Stock market (3) Capital account of RMB (4) Supervision system
The difference of financial situation between China and Vietnam High economic growth in Vietnam 2001—2007, average growth rate 7.7% ， GDP growth rate was 8.5% in 2007 (11.9) GDP was 72 billion USD in 2007 (2500 or 7043 b) Foreign direct investment 20.3 billion USD in 2007.(65.8 b) Capital inflow 40 billion USD in 2007
Total loans increased 29% in 2006 年 And increased 29% in 2007 M2 increased 34% in 2006 and 50% in 2007 Bubble economy in housing market and stock market
Stock index increased 145% in 2007 Stock index increased 51% in first two mouths in 2008 。 Total value of stock in Vietnam was only 1 billion USD in 2006 but increased to 15 billion USD in February 2008.
From January to May 2008, total import 30 billion USD, export 30 billion USD, Trade deficit reached 14.4 billion USD. Total export in 2008 estimated 59 billion USD and import 86 billion USD. The trade deficit may be 16% of GDP. Total export 1221 billion, import 917 billion, trade surplus 305 billion in China in 2007.
Deficit of government budget 5% of GDP in 2007 GDP 24 trillion and government deficit 0.2 trillion, less than 1% in China. High inflation rate Inflation rate was 21.4% in April 2008, and 25.2% in May Price level of food increased 34% in April 2008 and 42% in May, 2008. Interest rate increased from 8.75% to 12%. (inflation rate was 7.8% in May 2008 and interest rate was 4.14%.)
Devaluation of currency Exchange rate to USD changed from 1 ： 15800 in March to 1 ： 16300 in April 。 Exchange rate decreased 30% in future market 。 Foreign debt was 15.7 billion USD in April 2008 23.4% of GDP Short term debt was 10 billion Foreign currency reservation was 23 billion USD (1900 billion USD)