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. Broad Money

    In economics, broad money refers to the most inclusive definition ...
  2. Cheap Money

    A loan or credit with a low interest rate, or the setting of ...
  3. China Currency Bill

    A potential law passed in September 2011 by the U.S. Senate that ...
  4. Money Market Fund

    An investment fund that holds the objective to earn interest ...
  5. Near Money

    An economics term describing non-cash assets that are highly ...
  6. Dear Money

    A situation in which money or loans are very difficult to obtain ...
Related Articles
  1. Insights

    How Does China Manage Its Money Supply?

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

    What is a Complement?

    A good or service that’s used in conjunction with another good or service is a complement.
  3. 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.
  4. 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.
  5. Retirement

    Introduction To Retirement Money Market Accounts

    Money market funds are used in retirement plans and accounts because they are liquid, stable and pay competitive rates of interest.
  6. Investing

    Why Money Market Funds Break The Buck

    These funds are noted for their safety in a rough market. Read on to find out why.
  7. Investing

    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.
  8. Trading

    How Will China's Currency Moves Affect The U.S.?

    We look at what China's reaction to a currency manipulation bill mean for the U.S., businesses, consumers and investors.
RELATED FAQS
  1. How do changes in national interest rates affect a currency's value and exchange ...

    Generally, higher interest rates increase the value of a given country's currency, but Interest rates alone do not determine ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. Are money market accounts for short-term investments a good idea?

    Learn whether money market accounts are good ideas for short-term investments. Money market accounts combine aspects of a ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  6. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
Trading Center