1. CAPITAL INFLOW AND HOT MONEY Dianqing Xu China Center of Economic Research

2. 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 ，

5. Hot Money  Capital inflow does not equal to hot money.  Basic characteristics of hot money :  First, time, short term  Second, space, high liquated

6.  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.

7. 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.

8. 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.

9.  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.

10.  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.

11. 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

12. 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

13.  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.

15.  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

16. 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

17.  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

18.  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.

19.  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.

20.  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%.)

21.  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)