Hot Money and Quantitative Easing: The Spillover Effects of U.S. Monetary Policy on Chinese Housing, Equity and Loan Markets

Abstract

We develop a factor-augmented vector autoregression model to estimate the effects of changes in U.S. monetary policy and economic policy uncertainty have on the Chinese housing, equity and loan markets. We find that the decline in the U.S. policy rate since the Great Recession has led to a significant increase in Chinese regulated interest rates and to a rise in Chinese housing investment. One possible reason for this effect is the substantial inflow of hot money into China. The responses of Chinese variables to U.S. shocks at the zero lower bound are different from those responses in normal times. Moreover, increased uncertainty regarding U.S. policy negatively impacts the Chinese real estate markets during normal times but not at the zero lower bound.