Hot Money Stops Flowing Into China

One unintended benefit for the economy from the global financial crisis is that the flow of hot money into China has slowed to a crawl or less.

The latest quarterly figures from the central bank show foreign exchange reserves rising to $1.9 trillion at the end of September, up from $1.8 trillion at the end of June, a rate of increase that is slower than previously and less that what the inflow of foreign exchange from a record $29 billion trade surplus and $9.9 billion in foreign direct investment would suggest, even after adjusting for the dollar’s recent rise. (China’s foreign exchange reserves are denominated in dollars.)

All of which supports the notion that the hot money inflow has stopped. Or even reversed. (China’s secrecy over the composition of its reserves makes it difficult to disambiguate the factors.) The FT quotes Stephen Green of Standard Chartered saying data showed a clear exodus of “unexplained” capital in the last quarter after inflows of $162 billion in the first half.

The yuan has barely budged against the dollar in the past couple of months. That has taken the speculative fervor out of any bet that it would continue its previous rise. The tens of billions of dollars that had flooded in in that hope had officials worried about their potentially destabilizing effect, particularly on efforts to dampen inflation.

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