Management Review

›› 2016, Vol. 28 ›› Issue (3): 12-19.

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The Dynamics and Driving Factors of China's Hot Money Flows since the Financial Crisis of 2007

Yang Haizhen1, Shi Fangfang1,2,3   

  1. 1. School of Economics and Management, University of Chinese Academy of Sciences, Beijing 100190;
    2. Post-doctoral Workstation China, Huarong Asset Management Corporation, Beijing 100033;
    3. Post-doctoralResearch Center, School of Economic and Management Wuhan University, Wuhan 430072
  • Received:2015-04-08 Online:2016-03-28 Published:2016-03-31

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Abstract:

The cross-border flows of hot money in China have remained wildly volatile since the financial crisis of 2007. In the complex and uncertain economic environment at home and abroad, the factors that drive the hot money flows in China may change structurally, which means the driving factors may vary from period to period. Based on the indirect method, this paper measures China's hot money flows since 2007, analyzes its characteristics using preliminary descriptive statistics, and then applies a combined model of Markov regime-switching (MS) model and ARDL model to identify driving factors of hot money flows in China. Our empirical results indicate that the dynamics of China's hot money flows have two regimes, which are "risky" regime and "normal" regime. In "risky" regime, corresponding to the period of higher global risk and lower economic growth, none but global risk stands significant in explaining the hot money dynamics. In the "normal" regime, corresponding to lower global risk and higher economic growth, hot money is driven not only by global risk but also by domestic factors. Only in the "normal" regime can the profit-driven nature of hot money be exposed, that is, hot money is attracted into China by higher interest rates and expectation of exchange rate appreciation.

Key words: China, hot money flows, driving factors, MS-ARDL