An Empirical Study On The Influence Of Hot Money Flows On The Stock Market In China

The stock market is a barometer of the national economy, and the national economy has agreat impact on the stock market as well. Entering the21st century, China’s economy hasundergone tremendous change, so is China’s stock market. In particular, in2002China’s net errorsand omissions of international balance of payments finally turned positive after more than tenyears of negative, which seemed suggesting hot money inflows has opened footsteps to China.The process of internationalization of RMB is accelerating little by little, in the meanwhilethe capital account must be open more extensively and deeper. Investment funds of other countriesshutting back and forth to China will have a huge impact on Chinese economy then.Based on the above issues, this paper reviews the current methods of measurement of hotmoney, then select the appropriate method and improve to calculate the size of hot money flows.Total scale of hot money is separated to trend and fluctuation according to the real GDP growthrate, NDF (Non-deliverable Forwards), the interest rate gap between China and the UnitedStates and the actual inflation rate. In the process of the extraction of hot money trend andfluctuation, we find there is outflows of hot money occasionally recent years in China, and thereexists abnormal fluctuations of large hot money. As for the empirical measurement methods, aVAR model is used to analyze the impulse response between hot money trend, hotmoney fluctuation and stock indexes. Time-varying parameter vector autoregressive(TVP-VAR) model is used as well to test whether the parameters are time-varying during thesample period due to the financial crisis. Impulse response results show that hot money fluctuationshock is not significant, but the response of Shanghai Composite Index to the trend term of hotmoney shock is positive, which means international speculators put lots of hot money to the stockmarket, as a result pulling up the Shanghai Composite Index. Then we use variance decompositionto analyze the effects weights of different factors of hot money trend regression factors, we findthat real GDP growth rate and interest rate is the biggest factor in most stock indexes, showingthat China stock market is affected by the economic fundamentals and monetary policy in theUnited states. When the United States implements quantitative easing monetary policy, the interestrate gap between China and the United States is positive, attracting hot money flowing intoChina. According to modern monetary supply theory, hot money will improve the domestic moneysupply from two aspects, the monetary base and the multiplier effect, as a result of which improvethe stock price. Then this paper use Shenwan large cap index, Shenwan midcap index, Shenwansmall cap index as examples to analyze the impact of hot money on the stock index of different sizes. And then take non-ferrous metal industry stock index and the real estate industrystock index as an example to test the impact of hot money on the stock index of differentindustries. The results show that the scale preference of hot money investment is not obvious, buta clear preference for industry exists. Finally, on the basis of the conclusion of the empiricalanalysis, we put forward some relevant policy suggestions, such as promoting the reform of RMBexchange rate system, improving the financial supervisions and so on.