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. Money Supply

    The entire stock of currency and other liquid instruments in ...
  5. Money Market Fund

    An investment fund that holds the objective to earn interest ...
  6. Money Flow

    Calculated by averaging the high, low, and closing prices, and ...
Related Articles
  1. 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.
  2. Investing

    How Do Interest Rates Affect the Stock Market?

    Interest rates can have a complicated ripple effect through financial markets. Here's what you need to know.
  3. Investing

    The Pros And Cons Of Money Market Funds

    Find out whether stocking your money in these accounts will stand up to the test of time.
  4. Personal Finance

    5 Mistakes You're Making With Money Market Accounts

    Money market accounts can be helpful "parking spots" for investors. Here are five key things to keep in mind when opening an account.
  5. Investing

    Burger King's New Hot Dogs:Vertical Integration Genius

    Burger King is moving beyond burgers into hot dogs. Here is why this is a smart move.
  6. Insights

    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?
  7. Insights

    What Is Money?

    It's a part of everyone's life, and we all want it, but do you know how it gains value and how it is created?
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. 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 >>
  4. What are the risks involved in keeping my money in a money market account?

    Setting aside funds in a money market account can be a safe investment strategy, but investors should be aware of the risks ... Read Answer >>
  5. How does money supply affect interest rates?

    Read about the link between the supply of money and market interest rates, and find out why money supply alone can't explain ... Read Answer >>
  6. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center