Hot Money

What is 'Hot Money'

Hot money is currency that moves regularly, and quickly, between financial markets so investors ensure they are getting the highest short-term interest rates available. Hot money continuously shifts from countries with low interest rates to those with higher rates; these financial transfers affect the exchange rate if there is a high sum and also potentially impact a country’s balance of payments. Hot money can also refer to money that has been stolen but is specially marked so it can be traced and identified.

BREAKING DOWN 'Hot Money'

Hot money exists not only in regard to currencies of different countries but also in reference to capital invested in competing businesses. Banks seek to bring in hot money by providing investors short-term certificates of deposit (CDs) with interest rates that are higher than average. Once the bank lowers its interest rates, or another financial institution offers higher rates, investors withdraw hot money funds and move them to take advantage of the higher interest rates.

China as a Hot, and Then Cold, Money Market

China’s economy provides a clear example of the ebb and flow of hot money. Since the turn of the century, the country’s rapidly expanding economy, accompanied by an epic rise in Chinese stock prices, established China as one of the hottest hot money markets in history. However, the flood of money into China quickly began to reverse direction following a substantial devaluing of the Chinese yuan and a major downside correction in China’s stock markets. The Royal Bank of Scotland’s chief China economy analyst, Louis Kuijs, estimates that in only a six-month time period, from September 2014 to March 2015, the country lost somewhere in the neighborhood of $300 billion in hot money.

The reversal of China’s money market is historic. From 2006 to 2014, the foreign currency reserves in the country multiplied, leaving the balance at $4 trillion. Part of the balance was accrued from foreign investors buying into long-term investments in China, such as factories, companies and other businesses. A large portion, however, came from hot money; investors bought bonds selling at a promising rate and stocks that proposed a fast and significant return. Investors also borrowed money in China, at a cheap rate, to purchase high-rate bonds in other countries.

The Aftermath

Onlookers around the world viewed the Chinese market as a great deal for hot money because of its booming stock market and strong currency. In 2016, however, the bloom is off the rose. China is quickly losing favor, specifically among investors with hot money to spend. Stock prices have increased to the extent there is no upside. The up and down of the yuan, since the end of 2013, is also causing investors to pull out of the country and breeding hesitancy among potential investors. During the nine-month period between June 2014 and March 2015, the foreign exchange reserves of the country dropped more than $250 billion.

RELATED TERMS
  1. Hot Issue

    An issue that sells at a premium over the public offering price ...
  2. Hot IPO

    An initial public offering that appeals to many investors and ...
  3. Hot Hand

    The notion that because one has had a string of successes, he ...
  4. Easy Money

    In the most literal sense, money that is easily acquired. Academically ...
  5. Money Supply

    The entire stock of currency and other liquid instruments in ...
  6. China Currency Bill

    A potential law passed in September 2011 by the U.S. Senate that ...
Related Articles
  1. Markets

    How Does China Manage Its Money Supply?

    Here's how the Central Bank of China manages its currency rates and the money supply.
  2. Trading

    6 Factors That Influence Exchange Rates

    An in depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  3. Markets

    Is It the Right Time to Invest in China?

    A crash in August and a partial recovery thereafter. What's driving China's markets, and are Chinese investments still a good bet in the long run?
  4. Markets

    What is a Complement?

    A good or service that’s used in conjunction with another good or service is a complement.
  5. Markets

    How the Chinese Stock Market Heavily Affects the US

    Learn about the ways in which the Chinese stock market affects the U.S. economy, the dollar, the interest rate and imports and exports.
  6. Markets

    Is China Getting Nervous About a U.S. Rate Hike?

    Learn about China’s recent economic history. Discover the likely economic implications of rising U.S. interest rates on the Chinese economy.
  7. Markets

    Macroeconomics: Money And Banking

    By Stephen Simpson TMoney can be thought of as any good that is widely used or accepted in the transfer of goods and services. Today, there are three common forms of money in use. Commodity ...
  8. ETFs & Mutual Funds

    FXI: 4 Reasons to Still Avoid Chinese ETFs

    Learn about the economic factors that have created a slowdown in the Chinese economy and why investing in Chinese stocks is still a risky endeavor.
  9. Markets

    The Chinese Economy Needs More Stimulus

    China's central bank, the Peoples' Bank of China (PBoC), has cut its benchmark interest rate for the sixth time in 12 months, to a record low of 4.35%, casting doubt on the growth expectations ...
  10. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
RELATED FAQS
  1. What is "hot money"?

    "Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the ... Read Answer >>
  2. Sometimes investment banking firms allocate shares of hot issues to the personal ...

    The correct answer is a) Spinning is the act of selling hot issues to the personal accounts of corporate officers which in ... Read Answer >>
  3. How do changes in national interest rates affect a currency's value and exchange ...

    Understand the role that changes in interest rates can play in determining the value and foreign exchange rate of a country's ... Read Answer >>
  4. Is a money market account the same as a money market fund?

    Discover the differences between money market accounts and money market funds, including minimum balance requirements, withdrawal ... Read Answer >>
  5. What does it mean when a country has little activity in its capital account?

    Know what a country's capital account represents and understand what the implications are if a country has little activity ... Read Answer >>
  6. What economic indicators are most used when forecasting an exchange rate?

    Discover what economic indicators are most widely used to forecast a country’s exchange rate and how various factors influence ... Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center