Hot money, also known as speculative capital or speculative short-term capital, is a short-term speculative fund that flows rapidly in the international financial market only for the pursuit of the highest return and the lowest risk. The speculative movement of international short-term funds is mainly to escape political risks and pursue the interests of exchange rate changes, important commodity price changes or international securities price changes. Hot money is the speculative behavior of pursuing the interests of exchange rate changes. When speculators expect the price of a currency to fall, they sell the forward foreign exchange of that currency in order to buy it at a lower spot foreign exchange after the futures expire, thus earning interest on the exchange difference. Because this is pure short-selling speculation, which is different from arbitrage. In the foreign exchange market, this kind of speculative funds often convert the domestic currency with depreciation tendency into the currency with appreciation tendency, which increases the instability of the foreign exchange market. Therefore, as long as the expectation psychology exists, only by letting the appreciating currency fluctuate greatly or implementing foreign exchange control can this speculative capital flow be stopped.

The fundamental reason why high interest rates will lead to the inflow of hot money is to earn spreads.

For example, when the exchange rate of RMB against the US dollar is 1: 8, I entered China with 1 10,000 US dollars, which can be converted into 8 million RMB according to the exchange rate. After a while, when the exchange rate of RMB against the US dollar was 1: 7, I changed 7 million RMB into 1 10,000 US dollars (this is capital), so there was still 1 10,000 RMB left, which means that I earned 1 10,000 RMB from the China municipal government during this period.