The recent flow of "hot money" in China

Yosuke Tsuyuguchi
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Yosuke Tsuyuguchi: Bank of Japan

No 09-E-3, Bank of Japan Review Series from Bank of Japan

Abstract: It is difficult to obtain a clear picture of the flow of short-term funds -- so-called hot money -- in to and out of China from balance of payments statistics because of the effects of three measures introduced by the Chinese authorities. They are monetary policy measures of the People's Bank of China (PBC), namely (1) foreign-exchange swap transactions with banks in China and (2) requests to some major banks that reserve requirements be deposited in the form of foreign currency, together with (3) the authorities' establishment of China's sovereign-wealth fund, China Investment Corporation (CIC). When the effects of these measures are taken into account, it is apparent that a huge amount of "hot money" flowed into China during 2007 and the first half of 2008, and then flowed out of China in the second half of 2008. Active arbitrage transactions which utilized the movement of the RMB forward exchange rate vis-a-vis the USD away from interest rate parity seem to be a key factor in the inward and outward flows of "hot money".

Date: 2009-07
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