• Trade & Commerce

Estimates of China’s “Hot Money” Flows

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

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

Over the same time period, China’s accumulated trade surplus was $99.0 billion and its FDI inflow was $52.0 billion. Using the method described above, China received an inflow of $129.6 billion in “hot money” during the first half of 2008. 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.

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