What is hot money?

Hot money, that is, hot money. It refers to short-term assets that flow between various financial markets in pursuit of high profits. It has the characteristics of strong speculative nature, fast liquidity, and obvious tendency. If there is a difference, then hot money is an international fund that specializes in earning short-term capital gains such as exchange rate differences in various places and flowing around the world.

Hot money can also include domestic private funds, so it is larger than the general concept of hot money.

The existence of hot money can play a certain positive role in regulating international capital surplus and shortage and activating financial markets. However, its negative effects are also considerable: first, hot money will cause ups and downs in the foreign exchange market due to speculative operations that shake a country's exchange rate, and ultimately distort the exchange rate level; second, large amounts of hot money entering and exiting a country will cause a large increase or decrease in foreign exchange reserves. Promote the sharp rise and fall of the stock market; third, the rapid movement of hot money, often inversely with the monetary control policies of various countries. For example, when a country raises interest rates to curb inflation, international hot money will pour in, forcing the country to passively increase the amount of currency and aggravate inflation. This will obviously make it more difficult for the monetary authorities to stabilize the economy and affect the expected effects of the country's macroeconomic controls. Hot money will not only cause economic turmoil and financial crisis, but also spread the crisis to other countries through speculative operations in the financial market.

For example: The speculative operation of investment funds represented by Soros's "Quantum Fund" in the international financial market is of typical significance. In 1992, Soros discovered that due to the great differences in economic development among European countries, the European monetary system was facing contradictions and difficulties. In particular, the exchange rate of the pound at that time was too high, and the British economy was in severe recession, making it difficult for the pound to maintain its current status. exchange rate, so he placed a huge bet on the British pound speculative operation - a short position worth tens of billions of dollars. Although the British government used tens of billions of dollars in foreign exchange reserves to intervene in the market and twice announced an increase in interest rates, it still could not stop speculative capital led by Soros (other types of hot money also joined in under the influence of the "Quantum Fund" demonstration effect In the speculative operation on the British pound), there was a flood of attacks. The British government was forced to announce its withdrawal from the European currency unified exchange rate system on September 16, 1992. The pound depreciated sharply, and Soros made a net profit of US$958 million. After the British speculative operation was successful, a large amount of hot money was transferred through the international financial market to attack the currencies of other countries. Soros went long futures in France and Germany and short in Italy and other countries, making a profit of more than 1 billion U.S. dollars, which caused a wave-like impact on the economies of European countries and triggered the European financial crisis.

In Asia, the transmission of the financial crisis through this channel is also very obvious. The manipulators of international hot money first opened a Thai baht account in the Bank of Thailand, borrowed a large amount of Thai baht from the Bank of Thailand and sold them, and at the same time bought a large amount of US dollars. Under the strong impact of speculative forces, a financial crisis broke out in Thailand. When Thailand implemented a floating exchange rate and triggered a financial crisis, international hot money targeted the Philippines through the open financial market. On July 7, 1997, in order to prevent sharp currency fluctuations, the Philippine Central Bank raised interest rates by 20% overnight and raised the domestic overnight lending rate from 24% to 30%. However, due to the massive selling of the peso, the Philippine Central Bank had to intervene in the market by selling US$400 million within one hour. On July 11, the Philippine central bank was forced to change the relatively fixed exchange rate system to an exchange rate system that "floats within a wider range based on market factors." On that day, the peso fell 11.6% against the US dollar, and the Philippines fell into a financial crisis. South Korea, Malaysia, Indonesia, etc. also fell into financial crises due to their respective open financial markets and the transmission of international hot money.