Analysis Of The Impact Of International Hot Money Inflow On The Prices Of Stock Market And Estate Market In China

Since2003, with the international economic recovery and a gradually increasingflow of global capital, the amount of International Hot Money inflow has dramaticallyaugmented. Especially after the exchange rate reform in2005, against the backgroundof a wide expectation of RMB appreciation, a great deal of International Hot Moneyhas frequently transited in order to look for arbitrage chances. Due to a lack ofeffective monitoring system, much of this International Hot Money has been investedinto profitable industries such as stock markets and real estates. Once the economy inChina falls into recession, this huge capital would be withdrawn, which will definitelyput our virtual economy, even the real economy at great risks.Regarding International Hot Money as the main line, based on the analysis of itsbasic connotation, characteristics, source of origin, inflow motivation and paths, thisdissertation probes into the influences exerted by International Hot Money on stockprices and real estate prices from three aspects, namely Theoretical Model,Transmission Mechanism as well as Realistic Analysis. In the perspective ofTheoretical Model, CLR Model was used as the primary model. And TransmissionMechanism mainly borrowed ideas from the analysis that International Hot Moneyhas an impact on the prices of non-traded goods, while Realistic Analysis particularlyexplained the concrete mechanism, which means how International Hot Money affectsstock markets and real estates in China.The empirical parts in this thesis examined the relation among International HotMoney, stock prices and housing prices. In the first place, this paper accounted thescale of International Hot Money according to this formula, which is “Adjusted forIncreased Foreign Exchange Reserve-Adjusted Trade Surplus-FDI+Hot Money inFDI”. The empirical test can be mainly divided into two sections: firstly, based onVAR Model, this paper provided a preliminary analysis of the relationship ofInternational Hot Money, exchange rate, The Shanghai Composite Index andcommercial housing prices using Granger Causality Test, Impulse Response Function,and Variance Decomposition. The study concluded that the RMB appreciation is themain reason for International Hot Money inflow which has much more influence onhousing prices than on stock prices, at the same time, the partial substitution effect ofhousing prices and stock prices makes it possible that rises of housing prices boosts increases of stock prices. Secondly, the author tested stock prices and housing priceswith HP Filter, separating out trend constituent and wave constituent, then inspectedthe relativity of trend component, wave component and variation of International HotMoney. The results showed that International Hot Money not only arouses theincreasing tendency of housing prices, but also the fluctuation of housing prices.Moreover, stock prices can only fluctuates when International Hot Money is at10%significance level. Some conclusions of this thesis are different slightly with thosemade by prior researchers, partly because of different variable indexes chosen anddifferent research methods.Finally, in light of the conclusions derived from theories and empirical tests, theauthor proposed relevant suggestions and proposals as to the issue of InternationalHot Money inflow.