Second, yuan deposits are reluctant to go out. Despite the introduction of the QDII system and the permission to individual investment in QDII last year, few are really interested in investing their money in foreign countries, as their first 5 percent return is soon wiped away when exchanged into yuan. And in the case of investing in zero-risk assets valued in either US dollars, HK dollar, euros, or yen, the returns are even lower than 5 percent.

Third, while more hot money rushes to China and domestic capital refuses to go out, while the trade surplus expands due to a suppressed exchange rate, while foreign exchange reserves keep piling up beyond the current level of 1.4 trillion US dollars. What shall we do with this huge sum of money? Where should we invest? Who should take the responsibility? Under such pressure, it becomes inevitable for state owned banks and enterprises to buy projects and firms in foreign countries, hence the establishment of the China Foreign Exchange Investment Corporation. And this makes the government a significant investor in the global market, which will bring inevitable challenges and waste.

The fourth outcome is trade surplus hikes. The yuan’s exchange rate can be considered as the prices of labor, environment, and resources in China. At this time, a faster yuan rise translates into higher labor prices in the international market and elevated costs for both environment pollution and resource consumption. On the contrary, if the yuan only tiptoes forward, China’s manpower and natural resources are then consumed at excessively low prices, which guarantees a continued ballooning trade surplus.

All this money has to find its way. And so come the unbelievably high prices in some asset markets once huge money squeezes into it.

So where can this money exactly go?

The most popular way of investment for Chinese is obviously deposits in banks. However, depositors find they are actually losing money by handing over their money to savings accounts, because the previous consecutive interest rate rises don’t really work—with the benchmark at about 3.5% and inflation at 6.5%, real interest rate is still negative. And as long as the real interest rate stays negative, rate hikes won’t succeed in guiding investment directions as previously assumed.

The second most reliable investment is real estate, as it’s a visible and tangible asset, and also brings immediate profit when rented. When domestic and foreign capital is highly excessive and deposits inadvisable, massive money naturally surges to the real estate market, and brings up prices in one swoop. Despite the desperate efforts the government has made in the prior period to restrain housing prices, they are still flying, as there is just too much excessive liquidity due to such a slow yuan appreciation.