Hot Money
Candlefocus EditorHot money flows have a substantial impact on exchange rates, stock markets and global economies. Since hot money flows into any market, it provides access to capital for developing countries. This can be advantageous for economies as it leads to certain growth and development, increasing employment opportunities and creating an influx of new businesses. However, hot money inflows can also place considerable pressure on exchange rates and drive up local asset prices.
Recent examples of hot money can be seen during the Eurozone crisis, when investors were actively allocating funds to low-risk bonds, such as U.S. Treasury Bonds and German Bunds. Conversely, in October 2018, Saudi Arabia experienced a sudden influx of hot money thanks to its stuttering economy, as investors withdrew their investments from higher-risk emerging markets such as Argentina and Brazil and placed them into Saudi Arabian assets.
The Chinese economy is an example of a hot money market that turned cold following investor flight. Since 2011, foreign investors have been pulling out their investments from China, which has weakened the country’s foreign exchange reserves and stock markets. This downward trend has been further exacerbated by the trade war between the United States and China, causing investors to become increasingly wary of the Chinese economy.
Hot money inflows can create financial instability if left unchecked, as swift outflows can leave an economy vulnerable to financial shocks. This is why it is important for any country to carefully monitor hot money inflows and introduce appropriate capital controls to reduce the volatility of capital flows and ensure economic stability.