The flow of Hot Money into Asian and Asean economies has been the hottest year-end economic development in the region. Paul Ebeling Jnr. gives his current analysis and Shayne
Heffernan discusses Dark Pools.
Short-term speculative funds are called hot money. Hot money has started flowing into the BRIC and Asean nations at an unprecedented rate as their economies appear to slowly emerge from the global downturn.
Academics estimate that the total amount of hot money that recently found its way to mainland China was in the vicinity of more than US$300 billion, accounting for upwards of 15 percent of the country’s foreign exchange reserves. In the wake of the U.S. financial crisis, hot money rapidly left China’s markets last September, but now as the property market begins to heat up, speculative funds have returned.
Although these funds at first entered the real estate market, they are now moving toward the stock market. Analysts now predict that the speculative funds will soon move into the commodity markets.
HOT MONEY FINDS ASEAN
How much hot money has flowed into China? There’s been a surge in the amount of hot money flowing into China over the past two months, according to Li Youhuan, a researcher in Guangdong Academy of Social Sciences, who has been researching speculative funds, hot money, since 2002.
Wang Tao, Chief Economist at UBS Securities, estimated that nearly US$56 billion, or about 33 percent of the total US$170 billion second quarter increase in China’s foreign exchange reserves, could not be explained by reference to either money inflows from the trade surplus or fluctuations in the foreign exchange rate.
The foreign exchange reserves growth figures for the 2010 second quarter were significantly higher than those registered in the several preceding Q’s. The central bank’s foreign exchange accounts provide further evidence that hot money is back.
Data released by the People’s Bank of China revealed that in the 2010 first quarter, the central bank purchased an average of US$100 billion worth of foreign currency every month.
However, from April, this figure began to increase dramatically and climbed to nearly US$290 billion in May. Wu Nianlu, a professor from the Graduate School of the People’s Bank of China, said that while it was possible that the surge in the amount of foreign currency purchased by the central bank could be due to inflows of hot money, he also noted that this growth may also have been affected by the foreign currency deposits of domestic Chinese individuals and foreign currency loans extended to domestic firms.
Ma Zihui, a macro-analyst at the Samsung Economic Research Institute China, estimated that the amount of hot money that had flowed into China in 1-H of this year reached between US$30-40 billion. He also noted that the country’s economic recovery and bullish capital market, ahead of expectations that the yuan might appreciate, are the main factors that attracted speculative capital, aka hot money.
Where does hot money come from and how does it enter China and other emerging economies?
It is a mystery, given the very formal and tight controls on foreign currency flows in and out of China. How do tens of billions of US$ hot money enter domestic markets and where does it come from? Lou Gang, a strategist at Morgan Stanley China, noted that not all hot money was necessarily foreign funds, and it is was possible that at least a portion of it are overseas assets held by Chinese financial institutions.
Wu Nianlu also pointed out that the foreign exchange deposits of domestic citizens and institutions were also capable of becoming hot money. Li Youhuan said his monitoring of China’s underground banks revealed that most of the hot money that began flowing into the mainland from April came from savings and investment
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