CAPITAL INFLOW AND HOT MONEY

1
CAPITAL INFLOW AND HOT MONEY

• Dianqing XuChina 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,

3
(No Transcript)
4
(No Transcript)
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.

14
(No Transcript)
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
• 20012007, 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?
• 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 115800 in
  March to 116300 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)