china raises interest rate - Question

Discussion in 'Economics' started by nutmeg, Feb 8, 2011.

  1. Won't money flow into China from other countries to take advantage of the interest rate difference?

    If so, what difference in exchange rates effect taking advantage of the difference in rates. Ie US, Europe zero vs China 3%.
  2. China (and other emerging economies that are raising rates) is worried about 'hot money' seeking to take advantage of the rate differential. I personally believe the worry is overblown and yet another way that governments push the focus away from their own destructive policies. All of these countries are busy suppressing the value of their currencies - it's no surprise that folks should want to buy an asset whose price is so clearly below its true value.

    FWIW, fixed direct investment overwhelms the amount of "hot money" flows. You'd be surprised how quickly this FDI turns into 'hot money' when panic sets in (it's used as collateral for loans).