Interest margin dealing and appreciation anticipation will lead to hot money inflow. Interest margin between China and America attracts large amount of hot money; since 2002, appreciation anticipation has caused the hot money inflow, and after the RMB exchange rate reform in 2005, self-realization of appreciation anticipation further strengthens the hot money inflow.
In the past several years, up to USD500bn was estimated to flow into China. Since 2005, propelled by interest margin arbitrage and enhanced anticipation of RMB appreciation, hot money has acceleratively flown in and hot money amounts up to USD500bn, about 41% of new foreign exchange reserve at the time.
Chinese interest rate has entered into descension period; it is estimated that RMB interest rate is to descend by 81-108 basic points in the coming half year, yet rate of USD has been down to nearly zero; RMB depreciation will reduce rate margin of the two countries, which results in hot money inflow. China’s economic work focus has been shifted to “growth maintenance” and monetary policies become relaxed, thus we predict that in the coming half year, further declined RMB rate will narrow the interest margin between China and America. In November 2008, processing trade shrank faster, which showed decreasing hot money inflow. In late December 2008, foreign exchange reserve declined despite increasing favorable trade balance in October and November 2008 and stable FDI status, which indicated the capital withdrawal.
Export stimulus and capital outflow may conduce that RMB exchange rate depreciates to 6.95 in the coming half year; if the depreciation anticipation has formed, it may break through 7 to 7.2. Export slowdown worsened domestic economic hardship and further RMB depreciation has gone against the current economic status. Under the pressure of export promotion and hot money inflow, RMB will depreciate to some extent in the coming half year. If we calculate based on USD500bn hot money inflow scale and 50% outflow, about USD40bn hot money will flow out each month, which drags RMB exchange rate to around 6.95. So as to stabilize the economy, we believe exchange rate stabilization is the best choice.