China: How much of its reserves is HOT money ?

[GoFlyKiteNow]

Hot money, also called speedy-flow capital, refers to extremely volatile short-term capital that moves with short notice to any country providing better returns. Powerful speculators can quickly pump massive sums into a high-yield economy, giving it an artificial aura of success and propriety. But, on a mere suspicion of a downturn or other negative factor, they can (and do) withdraw it almost overnight causing a near collapse of the country's financial structure.

There is growing concern that a substantial portion of China's foreign exchange reserves is HOT money and not direct FDI inflows for investment.

Consequently, the creation of bubbles in the economy ( stock market and real estate) and high inflation ( now at nearly 8% ) may be the disastrous end result.

 

[Hope]

Hot money, also called speedy-flow capital, refers to extremely volatile short-term capital that moves with short notice to any country providing better returns. Powerful speculators can quickly pump massive sums into a high-yield economy, giving it an artificial aura of success and propriety. But, on a mere suspicion of a downturn or other negative factor, they can (and do) withdraw it almost overnight causing a near collapse of the country's financial structure.

There is growing concern that a substantial portion of China's foreign exchange reserves is HOT money and not direct FDI inflows for investment.

Consequently, the creation of bubbles in the economy ( stock market and real estate) and high inflation ( now at nearly 8% ) may be the disastrous end result.

My friend,China opened for FDI since 1978,31 year ago.

Currently FDI is running at around US$80 billion a year,so what is so surprising to have reserve of US$2 trillion.use the maths.

Of course it would be a different story when the MNCs start remittance of profit back to save their home lands which are all in troubles.

See what shall happen?The first in the world as no other developing countries open its gate so wide to foreigners,the power of LKY.

 

[longbow]

Repatriation is at best limited.

Huge market potential in China. Many MNCs have been waiting for this moment. GM dumped their EU operations and kept their China operations - why? because they sell a lot of Buicks in China.

This is not hot money but solid reserves held in long term US Treasuries.

 

[longbow]

The bubble you are referring to is a result of Beijing stimulus. They dumped in $600B in under a year. So there is a bubble in the stock market.

As for fast money, well just go look at the factories owned by MNCs in China, unlike software outfits and call centers that can pull out over nights, a $1B powertrain factory is as fixed assets as it gets.

 

[Goh Meng Seng]

What the thread initiator meant was how much of China's reserves is in highly liquid CASH, in whatever currency.

When a foreign company invest directly in China, it exchanges its country's currency into RMB. If some foreign company bought items from Chinese manufacturers, they may pay in RMB. They will exchange their country's currency into RMB. This amount of foreign currency will fall into the central bank of China.

The Central Bank of China (People's Bank of China) may take these foreign currencies to invest in the bonds issued by these foreign governments or buy stocks or assets from those countries.

Or that, it just keeps it as cash, going into stock markets of these countries as and when there are opportunities. This is considered as "Hot Money".

Liquidity is an important part of the central reserves because the Chinese government may need to defend the RMB exchange rate at certain level, preventing it from appreciating or depreciating too much out of the specific range it has set for itself. Hot money is useful because it could be recalled in short notice so that the central bank could utilize them to sell in the market to prevent depreciation.

All central banks of the world will keep a certain amount of reserves as Hot money. This is normal practice.

Goh Meng Seng

 

[Hope]

What the thread initiator meant was how much of China's reserves is in highly liquid CASH, in whatever currency.

When a foreign company invest directly in China, it exchanges its country's currency into RMB. If some foreign company bought items from Chinese manufacturers, they may pay in RMB. They will exchange their country's currency into RMB. This amount of foreign currency will fall into the central bank of China.

The Central Bank of China (People's Bank of China) may take these foreign currencies to invest in the bonds issued by these foreign governments or buy stocks or assets from those countries.

Or that, it just keeps it as cash, going into stock markets of these countries as and when there are opportunities. This is considered as "Hot Money".

Liquidity is an important part of the central reserves because the Chinese government may need to defend the RMB exchange rate at certain level, preventing it from appreciating or depreciating too much out of the specific range it has set for itself. Hot money is useful because it could be recalled in short notice so that the central bank could utilize them to sell in the market to prevent depreciation.

All central banks of the world will keep a certain amount of reserves as Hot money. This is normal practice.

Goh Meng Seng

GMS,with due respect to you as an economist,I dont think so.

Wjhat the TS sked was actually how much of the US$2 trillion are for portfolio investment,as against FDI.

We are lucky that Ts is here to clarify,so no argument pl,if I am worng,I am sorry.

 

[Hope]

Repatriation is at best limited.

Huge market potential in China. Many MNCs have been waiting for this moment. GM dumped their EU operations and kept their China operations - why? because they sell a lot of Buicks in China.

This is not hot money but solid reserves held in long term US Treasuries.

I dont think so,and I expect huge profit for these greedy MNCs,they are due very soon,read the reports of Fortune 500,under profit ROW(rest of world)

we shall see.

 

[Goh Meng Seng]

GMS,with due respect to you as an economist,I dont think so.

Wjhat the TS sked was actually how much of the US$2 trillion are for portfolio investment,as against FDI.

We are lucky that Ts is here to clarify,so no argument pl,if I am worng,I am sorry.

FDI in China or foreign countries?

So he is referring to how much of these reserves are due to HOT Money flowing into China?

Chinese stock exchange is not really conducive for foreign investors yet. Apart from the control of currency flow, the stock market's part that is open for foreign investors are limited; i.e. not all the stocks listed are available for foreign investors. Some stocks has two categories with a category for foreign investors but with limited number of shares available.

Thus if he is asking about what is the composition of foreign inflow of money, I guess the bulk of it still remains in FDI or even properties, less on stocks and shares.

Goh Meng Seng

 

[Hope]

FDI in China or foreign countries?

So he is referring to how much of these reserves are due to HOT Money flowing into China?

Chinese stock exchange is not really conducive for foreign investors yet. Apart from the control of currency flow, the stock market's part that is open for foreign investors are limited; i.e. not all the stocks listed are available for foreign investors. Some stocks has two categories with a category for foreign investors but with limited number of shares available.

Thus if he is asking about what is the composition of foreign inflow of money, I guess the bulk of it still remains in FDI or even properties, less on stocks and shares.

Goh Meng Seng

GMS,you have not changed one bit

Good luck to yr MP dream,akan datang

 

[GoFlyKiteNow]

What the thread initiator meant was how much of China's reserves is in highly liquid CASH, in whatever currency.

When a foreign company invest directly in China, it exchanges its country's currency into RMB. If some foreign company bought items from Chinese manufacturers, they may pay in RMB. They will exchange their country's currency into RMB. This amount of foreign currency will fall into the central bank of China.

The Central Bank of China (People's Bank of China) may take these foreign currencies to invest in the bonds issued by these foreign governments or buy stocks or assets from those countries.

Or that, it just keeps it as cash, going into stock markets of these countries as and when there are opportunities. This is considered as "Hot Money".

Liquidity is an important part of the central reserves because the Chinese government may need to defend the RMB exchange rate at certain level, preventing it from appreciating or depreciating too much out of the specific range it has set for itself. Hot money is useful because it could be recalled in short notice so that the central bank could utilize them to sell in the market to prevent depreciation.

All central banks of the world will keep a certain amount of reserves as Hot money. This is normal practice.

Goh Meng Seng

You got it right.
Thanks for explaining this out on this forum.

Countries have made immense blunders before accepting hot money into their capital accounts rather than current accounts. Consequently when a pull back occurs, these countries have their financial systems broken down.

Example is Thailand and Indonesia during the Asian financial crisis. Speculators pulled out so much of hot money , these countries had to devalue their currency tremendously, just to save themselves from a total collapse and melt down. But the damage was done.

My question was along these lines when I posed how much of China's reserves is Hot money.

I read somewhere that a bulk of its reserves are indeed Hot money gone into shares. China had a "lock in" period of two years for foreign speculators buying large amt of stocks. Most of these "lock in" periods are now expiring and given the present financial crisis and the drastic fall in exports, there is a likelihood of massive liquidations of stocks and property for repatriations purposes.

 

[cunnosieur]

HOT HOT HOT MONEY INDEED
PRC Bank Exec

--------------------------------------------------------------------------
Happen to be at waterloo street doing some bank transaction yesterday lunch time, was told by the counter staff to wait for 15min to half an hour. Went out for a quick puff and saw this gal leaning on my car talking on her phone. The moment she lift up her head, I was WOW..... Not bad leh. She smile back and say sorrie, I told her to carry on leaning in a joking way. We chatted awhile and got to know that she just arrived 3 weeks ago working at the Bank which I just went. So I try to date her out for a drink and she say OK (My Lucky Day).

Pick her up after her work at 5.30pm and we went downtown for dinner. I was trying my best to test water (NO LUCK). We headed to Boat Quay for a drink after dinner and I told myself this time DIE DIE also must ask. All of a sudden, she burst into tear (ALCOHOL EFFECT), saying she misses her parent. I try to console her and told her not to think so much. Time passes and we are now more open up, I pop up the question to her:

Me: Why dun you try to earn more money while you are in SG?
She: How to?
Me: Do part time lor.
She: What is part time?
Me: Must I go into detail, then you can understand.
(Slient for a while) and (Burst into laughter)
She: How much am I worth in your eye.
Me: Hard to say, depends on how good are you.
She: How much do you want to give me, if I say OK to you.
Me: 150 lor (Man Ego).
She: If I am good to you, you give me more is it?
Me: Let see how good are you.
Me: How???
She: Can try. Is it now?
Me: Now lor. If not when?
She: Where?
Me: I bring you there.

10.45pm we check into a hotel at chinatown and the rest is story.....

Name: Txxx Xxxx
Age: 25
Look: 7.5 (Young office exec look)
Stats: 34B / 24 / 34 (I think so)
BBBJ: Yes for me
FJ: 9 (good moaning)
Painting: Yes for me
CIM: No
AR: No
AJ: No
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Damage: 150 / 1shot
Overall: Good
RTF: Yes for sure (Bonking a Bank Exec)

Interested bro, PM me your contact and I will pass the number to her. She will call you directly.

http://www.sammyboyforum.com/welcome...bank-exec.html

 

[Leegimeremover]

Since there is so much talk about China FDI, I suggest someone looks up round tripping FDI. Some countries are excellent at using them, including China. This is for those really interested in learning something. I will not waste my time explaining here.

 

[longbow]

"There is growing concern that a substantial portion of China's foreign exchange reserves is HOT money and not direct FDI inflows for investment."



Ok help me understand this.

Topic is hot money referring to short term speculative $$$$. Example used was Thailand and the ensuing Tom Yam crisis. Go FlyKite was saying that large portion of Chinese reserves is hot money.

Fact:
Chinese RMB is tightly controlled
Chinese stocks are tightly controlled

So where is the hot money to go? Invested in factories and property? It takes a while to sell an office building but a few hours to get out of a stock position.

Remember these hot $$ guys want to pull their cash out fast and the speed at which they pull out their $$ is what killed Thailand. Malaysia locked their currency and shut down CLOB and pretty kill the hot $$ guys.

BTW also remember that many of the foreign investments from the initial stages required a 50% Chinese participation. Very often it is foreign company inject 100% of cash and Chinese partner comes in with licenses, some old equipment and Guanxi. Both share the new entity 50/50. That is probably a large chunk of your reserves. And should MNC want to pull out, Chinese partner have right of first refusal - you can imagine how long it will take to eventually get the money out.

BTW as an example look at Singapore's Suzhou project - we probably dumped in US$10B into that project. That is not hot money but it is FDI invested in China, stuck in China - part of that billions is probably in Chinese reserves. And if you go visit Suzhou it is full of MNCs that form the supply chain for the larger MNCs. It is a whole chuck of FDI going into China. Where do you think all that money to build the factories to make goods for the world came from? And when they valued added goods are sold there is even more money going into the reserves.

So where can a speculator park the hot money in China?

I think if you see any slowdown in growth of Chinese reserves it is due to Chinese investments outside of China. Chinese have been picking up billions in resource companies, trying to invest like SWF, ricj Chinese citizens are buying property in Singapore and travelling and of course given the global recession there is a slowdown in FDI.

 

[GoFlyKiteNow]

You got it right.
Thanks for explaining this out on this forum.

Countries have made immense blunders before accepting hot money into their capital accounts rather than current accounts. Consequently when a pull back occurs, these countries have their financial systems broken down.

Example is Thailand and Indonesia during the Asian financial crisis. Speculators pulled out so much of hot money , these countries had to devalue their currency tremendously, just to save themselves from a total collapse and melt down. But the damage was done.

My question was along these lines when I posed how much of China's reserves is Hot money.

I read somewhere that a bulk of its reserves are indeed Hot money gone into shares. China had a "lock in" period of two years for foreign speculators buying large amt of stocks. Most of these "lock in" periods are now expiring and given the present financial crisis and the drastic fall in exports, there is a likelihood of massive liquidations of stocks and property for repatriations purposes.

Estimates of China’s “Hot Money” Flows

Because “hot money”flows quickly and is poorly monitored, there is no well-defined, direct method for estimating the amount of “hot money” flowing into a country during a period of time. In addition, once an estimate is made, the amount of “hot money” may suddenly rise or fall, depending on the economic conditions driving the flow of funds.

One common way of approximating the flow of “hot money” is to subtract a nation’s trade surplus (or deficit) and its net flow of foreign direct investment (FDI) from the change in the nation’s foreign reserves.

1. For the first half of 2008, China’s foreign reserves increased by $280.6 billion.

2. Over the same time period, China’s accumulated trade surplus was $99.0 billion and its FDI inflow was $52.0 billion.

3 Using the method described above, China received an inflow of $129.6 billion in “hot money” during the first half of 2008.

4 According to the former director of China’s National Bureau of Statistics, Li Deshui, China’s research institutes estimate that about $500 billion in “hot money” has accumulated in China.

5. However, Zhang Ming, an economist at the Chinese Academy of Social Sciences, reportedly estimated that $1.75 trillion in “hot money” could have accumulated over the last five years.

6 Some Chinese experts reportedly predict that the amount of “hot money” in China will rise to $650 billion by the end of 2008.

7 Some western analysts think the Chinese figures underestimate the amount of “hot money” in China because they do not take into account changes in China’s monetary policies, such as the raising of reserve requirements and the creation of China’s sovereign wealth fund, the China Investment Corporation.

Taking into account these other factors, U.S. financial analyst Brad Setser
estimates that China received over $400 billion in “hot money” flows between April 2007 and March 2008.

http://www.fas.org/sgp/crs/row/RS22921.pdf

 

[longbow]

Unless you are referring to HK as part of China. Lots of hot money in HK but then HK is major financial market and many of the shares listed on Hang Seng are a proxy of the Chinese sotck market. With HK you can indeed dump $100M into the hang seng and then chose to transfer that money to another market in a matter of days.

The Chinese stock and property market itself is flying as a result of the stimulus package.

 

[Hope]

The paper below gives a fairly comprehensive report about the current situation.

www.cfr.org/content/publications/.../CGS_WorkingPaper_6_China.pdf

 

[GoFlyKiteNow]

Unless you are referring to HK as part of China. Lots of hot money in HK but then HK is major financial market and many of the shares listed on Hang Seng are a proxy of the Chinese sotck market. With HK you can indeed dump $100M into the hang seng and then chose to transfer that money to another market in a matter of days.

The Chinese stock and property market itself is flying as a result of the stimulus package.

If large amount of money (stimulus) is pumped into any economy, the stocks and shares will fly. That is logical. As is the case now with China stock market.

But the alert flags are up. The rise in shares prices is not broad based. Only certain sectors are up..indicating clear cut speculative activity in the market. Not economic fundamentals.

Thus the HOT money issue really takes center stage attention.
Prompting the next logical but very important question: How much HOT money is circulating and what percentage of the total ?

Which incidentally is my main thread starter question.!

 

[longbow]

When there is stimulus being pumped into the economy the run up in stock market need not be broad based. Even in the recent US stock market bubble, tech stocks appreciated much faster than the market.

That is also why you have the high growth mutual fund vs income based mutual funds.

Speculators will punt on stocks that can give the most return in a short period. Fundamentals are not important. These guy will punt on cheap stocks with potential to double of triple their price in a matter of days.

In short the speculative activity is coming from the stimulus money and Beijing is concerned about it. Remember that speculators do not invest in mutual funds.

My question is: "Since Chinese stock market is restricted how can hot money from outside the country even make it to the Shanghai stock market to impact it?"

Hot money in which I believe you are referring to $$ that can come in and out of the financial system in days if not hours thereby weakening the financial will not seek to by property.

Even access to RMB is controlled so I am trying to understand how this hot money is getting into China without Beijing's nod.

Perhaps one way to look at it is how we categorize "Hot". You are referring to "hot" in terms of liquidity and its ability for the flow to disrupt the Chinese financial system - according to your post. This is unlikely because of Beijing's control of RMB.

I suspect that what many are talking about is speculative "hot" money going into property. That is not "hot" to the degree of being able to affect the financial system (you buy block of condos it goes down 20% you probably try and rent it out or find a buyer which might take years). Money going into property from speculators outside the country is happening and that will cause a jump in the reserves but should not affect the financial system.

If large amount of money (stimulus) is pumped into any economy, the stocks and shares will fly. That is logical. As is the case now with China stock market.

But the alert flags are up. The rise in shares prices is not broad based. Only certain sectors are up..indicating clear cut speculative activity in the market. Not economic fundamentals.

Thus the HOT money issue really takes center stage attention.
Prompting the next logical but very important question: How much HOT money is circulating and what percentage of the total ?

Which incidentally is my main thread starter question.!