Hot money and quantitative easing: the spillover effect of U.S. monetary policy on Chinese housing, equity and loan markets

We study a factor-augmented vector autoregression model to estimate the effects of changes in U.S. monetary policy, as well as changes in U.S. policy uncertainty, on the Chinese economy. We find that since the Great Recession, a decline in the U.S. policy rate would result in a significant increase in Chinese regulated interest rates, and rise in Chinese housing investment. One possible reason for this is the substantial inflow of hot money into China. Responses of Chinese variables to U.S. shocks at the zero lower bound are different from that in normal times, which suggest structural changes in both the Chinese economy and the U.S. monetary policy transmission mechanism. Moreover, an increase in U.S. policy uncertainty negatively impacts Chinese stock and real estate market during normal times, but not at the zero lower bound.