How do foreign hot money flow and exit in China? What are the consequences?

The RMB exchange rate depreciated for several days in a row, and the total foreign exchange volume showed negative growth for two months in a row (see B44 version yesterday for details), which made the market exclaim that "hot money" was withdrawing from China, and the market was worried about the withdrawal of foreign capital from China. In fact, whether foreign "hot money" is really withdrawing from China cannot be concluded by simple phenomena, and further observation is needed; Whether the decrease in foreign exchange holdings is caused by the withdrawal of "hot money" is still uncertain. The negative growth of foreign exchange may be the outflow of foreign capital or domestic capital.

First of all, the recent depreciation of the RMB for several consecutive days is not a reversal of the RMB exchange rate, nor is it a shift from continuous appreciation to full depreciation.

Under the international monetary system dominated by the US dollar, when the RMB is not freely convertible and cannot really form an effective market exchange rate, the equilibrium price of the RMB exchange rate cannot be determined, and the effective exchange rate has considerable uncertainty. Since the exchange rate is a means of interest adjustment between countries, the government should ensure the stability of the exchange rate on the premise of national interests, rather than letting the expectations of investors in the international market determine the exchange rate price.

Recently, investors in the international market have shorted RMB. Although there are reasons such as the deterioration of the international economic environment and the downside risks of domestic economic growth, this is only a view or expectation of international investors on the future economy of China. In fact, it is uncertain whether China's economy is like this. As early as 1997, when the Asian financial crisis broke out, two books, China's Economic Collapse and China's Financial System Collapse, were also very popular internationally, but in fact, China's economy and financial market did not collapse, but the economy rose rapidly. Therefore, in the face of international investors or hedge funds shorting China, on the one hand, the government should study and analyze the reasons, markets and tools of this shorting and adjust our economic policies; On the other hand, the government should be prepared. If foreign hedge funds must make a fortune by betting on the depreciation of the RMB exchange rate, the government should also take the initiative to take the initiative and beat the gambling out of the water. Only in this way can the RMB exchange rate be truly stable and an effective RMB exchange rate mechanism be gradually formed. In this case, foreign "hot money" will not rush out of China.

Secondly, for the negative growth of foreign exchange, the reasons may be that the slowdown of export growth leads to the surplus of foreign trade and the decrease of foreign direct investment, as well as the slowdown of China's economic growth, falling prices, short selling in foreign markets and capital outflow from China, but these will not be the main reasons. Because of the global market turmoil, China's economic growth is still better than other markets, so China's market risk is lower than other markets, even higher.

According to the investigation of relevant research institutions, the outflow of funds is more domestic funds than so-called foreign "hot money". First of all, due to the adoption of foreign exchange settlement and sale system in China, under the expectation of RMB exchange rate depreciation in the near future, the willingness of domestic residents and enterprises to settle and sell foreign exchange has declined, preferring to hold foreign exchange rather than settle in RMB. This will naturally reduce the amount of foreign exchange. Secondly, the so-called "hot money" flow should include domestic residents emigrating overseas to flow their wealth overseas, as well as their investments outside the RMB, some gray income being transferred overseas through various channels, and investors who have made huge profits from real estate speculation in recent years but expect house prices to fall back will transfer their profits overseas. Third, foreign residents remit the money earned in China, and import and export trading companies export the profits through legal or illegal channels, and even flow the funds to Macau through public travel. Generally speaking, the recent decrease in the growth of foreign exchange holdings is mainly due to the great changes in the flow of local funds, rather than the withdrawal of so-called "hot money" from abroad.

In fact, the short-term change of RMB exchange rate changes the situation of unilateral appreciation and affects the flow of foreign exchange funds, which is not all bad for China. Because the current reduction in foreign exchange holdings is more due to changes in the flow of domestic funds. This change is in line with the reform direction of RMB exchange rate formation mechanism, and also with China's policy goal of reducing trade surplus and promoting import and export balance. At the same time, it is also conducive to slowing down the accumulation of foreign exchange reserves.

However, we should pay close attention to this change of capital flows and strengthen the supervision of these capital flows, especially the negative growth of foreign exchange holdings on domestic monetary policy. CICC's research shows that foreign exchange has been the main channel of China's basic currency in the past decade, which makes the central bank have to control excessive liquidity by increasing the statutory reserve ratio. The current negative growth in foreign exchange holdings will change this situation. This not only requires a gradual reduction in the deposit reserve ratio to ease liquidity, but also affects the business behavior of commercial banks. This may be the focus of the market, not the so-called "hot money" withdrawal of foreign capital.