The formation of hot money is due to the globalization of financial markets and the rapid expansion of international investment funds. In countries with abundant capital resources, many funds will reserve some short-term investment opportunities for liquid funds in order to seek high returns in addition to making medium-and long-term investments. Coupled with the development of global information technology, once there are good investment opportunities, investors all over the world will find that when they flock, there will be a lot of liquidity entering the local market. These funds can sometimes reach 654.38 billion yuan, which will have a great impact on the exchange rate and interest rate in the local market. In our market, hot money is mainly domestic capital. At present, the proportion of capital outside China in A-share operation is relatively small.
The existence of hot money has played a positive role in regulating the balance of payments surplus and capital deficit and activating the financial market. However, its negative impact is also considerable. First of all, hot money will shake a country's exchange rate because of speculation, leading to ups and downs in the foreign exchange market and eventually distorting the exchange rate level; Second, a large amount of hot money flowing into and out of a country will lead to a sharp increase or decrease in foreign exchange reserves and push the stock market up and down sharply; Third, the rapid flow of hot money often has the opposite effect with the monetary control policies of various countries.
For example, if a country raises interest rates to curb inflation, international hot money will flood in, forcing the country to passively increase the amount of money and aggravate inflation. This will obviously increase the difficulty for monetary authorities to stabilize the economy and affect the expected effect of national macro-control. Hot money will not only cause economic turmoil and financial crisis, but also spread the crisis to other countries through speculative operations in financial markets.