What’s hot money?
Hot money is a currency that often travels across financial markets, allowing investors to get the most significant short-term interest rates. Hot money flows from low-interest countries to high-interest ones. Financial transfers can alter a country’s currency rate and balance of payments. To help law enforcement and financial regulators track and identify stolen money, “hot money” means specifically marked cash.
Understanding
Hot cash may refer to rival enterprises’ capital and foreign cash. To attract revenue, banks offer short-term CDs with higher-than-average interest rates. If the bank reduces interest rates or a rival offers higher rates, investors will shift hot cash funds to the bank with a better bargain.
Remove trade restrictions and build sophisticated financial infrastructures to allow hot cash to circulate globally. In this context, money rushes into high-growth areas with high returns. Hot cash leaves underperforming nations and industries.
China: Hot-and-Cold Money Market
The flood of hot money is evident in China’s economy. China has become one of the world’s hottest money markets since the turn of the century due to its quickly growing economy and skyrocketing stock values.
After a severe yuan depreciation and stock market correction, the money flow into China reversed. Louis Kuijs, the Royal Bank of Scotland’s top China economy expert, thinks the country lost $300 billion in hot money between September 2014 and March 2015.
China’s money market turnaround is momentous. From 2006 to 2014, foreign currency reserves increased, establishing a $4 trillion balance, partly from long-term foreign investment in Chinese enterprises. A large portion came from hot money, which bought bonds with high interest rates and equities with excellent return potential. In addition, investors borrowed vast amounts of money in China at low rates to buy higher-rate bonds from other nations.
Due to a robust stock market and currency, the Chinese market attracted hot cash, but 2016 stock prices peaked, limiting the gain. The shifting yuan has also spurred widespread divestments since 2013. The country’s foreign exchange reserves fell to around $250 billion between June 2014 and March 2015.
In 2019, enhanced capital controls and the yuan depreciation took more than $60 billion from China’s economy between May and June, according to the Institute of International Finance.
Conclusion
- Investors transfer hot cash across economies and financial markets to profit from high short-term interest rates.
- Banks inject hot cash into an economy by offering short-term CDs at higher rates.
- The Chinese economy’s hot money market became cold after investors departed.
