Hot money inflows to china and effectiveness of capital controls.

53 p.The issue of hot money flows was first brought to the limelight during the Asian financial crisis, when sudden outflows caused currency devaluation and crippled capital markets. The management of capital flows thereafter came into prominence both in countries with developed economies in Asia and as well as emerging economies in which capital inflows were sizeable and necessary in view of economic development. China has been the primary destination for capital flows, in view of the rapid potential growth of its huge domestic market as well as its potential as the factory of the world. Such growth dynamics has resulted in speculators seeking to benefit from asset price appreciation, currency appreciation and interest rate differentials. China however has chosen to restrict capital inflows to fixed investments or specifically investments in sectors and assets which is beneficial to its economic development. It has imposed capital controls in its bid to curb speculative inflows or "hot money". This paper seeks to examine the evidence of hot money inflows and whether have capital controls been effective in curbing such inflows. It examines evidence at the level of national accounts from the balance of payments to determine the net capital flows. It examines the factors that attract hot money inflows and as a result the types of assets in which hot money tend to be invested in. It also examines the rise in asset prices that have been attributed to hot money inflows, the type of capital controls that are in place and whether have these capital controls been effective. The paper concludes with the author's view on the outlook for China's capital control policy going forward.Master of Science (International Political Economy