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C hina's Capital and ‘Hot’ Money Flows: An Empirical Investigation
Author(s) -
Cai Tao,
Dang Vinh Q. T.,
Lai Jennifer T.
Publication year - 2016
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12091
Subject(s) - economics , monetary economics , capital flows , foreign direct investment , capital outflow , capital (architecture) , volatility (finance) , equity (law) , net capital rule , capital formation , macroeconomics , financial capital , financial economics , market economy , liberalization , history , archaeology , political science , law , human capital
We examine time‐series characteristics of C hina's capital flows during 1998–2014. More specifically, we employ K alman filtering state‐space models to gauge the relative importance of permanent and transitory components in C hina's overall foreign direct investment ( FDI) , equity, bond, other investment and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state‐space models, we find that a larger difference between onshore and offshore renminbi interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S & P 500's volatility index, in contrast, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between C hina and the USA also suggest that these flows are less persistent and more volatile during 1998–2014 than previously found based on 1988–1997 data. Our results bear important policy implications as C hina engages in further reforms in its domestic financial system and greater integration with the world financial system.