1 Michael Pettis and Logan Wright, “Hot Money Poses Risks to China’s Stability,” Financial
Times, July 13, 2008.
Order Code RS22921
July 21, 2008
China’s “Hot Money” Problems
Michael F. Martin and Wayne M. Morrison
Foreign Affairs, Defense, and Trade Division
China has experienced a sharp rise in the inflow of so-called “hot money,” foreign
capital entering the country supposedly seeking short-term profits, especially in 2008.
Chinese estimates of the amount of “hot money” in China vary from $500 billion to
$1.75 trillion. The influx of “hot money” is contributing to China’s already existing
problems with inflation. Efforts to reduce the inflationary effects of “hot money” may
accelerate the inflow, while actions to reduce the inflow of “hot money” may threaten
China’s economic growth, as well as have negative consequences for the U.S. and global
economy. This report will be updated as circumstances warrant.
Economic conditions in China are of considerable concern to U.S. policymakers,
given the potential impact of China’s economy on the global and U.S. economy. The
recent large inflow of financial capital into China, commonly referred to as “hot money,”
has led some economists to warn that such flows may have a destabilizing effect on
China’s economy. In an op-ed column in the Financial Times, two China experts wrote
of hot money’s “ensuing money creation is fueling rising inflation, systemic
overinvestment, and an overextended banking system.”1 There are also indications that
“hot money” flows have played a role in the recent rise and fall of China’s stock and real
estate markets. Other economists have expressed concerns that efforts by the Chinese
government to control “hot money” inflows could have significant negative consequences
for the U.S. and global economy in the form of slower growth, greater inflation, or both.
Defining “Hot Money”
There is no formal definition of “hot money,” but the term is most commonly used
in financial markets to refer to the flow of funds (or capital) from one coun