On China's Capital Controls

Ⅰ. Introduction In the wake of the Debt Crisis of the early 1980s, the World Bank pub-lished a report to summarize developing countries’ experience in utilizingforeign capital. According to the report, "Foreign finance can promotegrowth through higher investment and technology transfers. It can allowcountries to adjust gradually to new circumstances in the world economy.

Putting the Cart before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China

This paper reviews the issues involved in moving towards greater exchange rate flexibilityand capital account liberalization in China. A more flexible exchange rate regime wouldallow China to operate a more independent monetary policy, providing a useful bufferagainst domestic and external shocks. At the same time, weaknesses in China’s financialsystem suggest that capital account liberalization poses significant risks and should be alower priority in the short term. This paper concludes that greater exchange rate flexibilityis in China’s own interest and that, along with a more stable and robust financial system, itshould be regarded as a prerequisite for undertaking a substantial liberalization of thecapital account.

US monetary policy uncertainty and RMB deviations from covered interest parity

This paper examines how US monetary policy uncertainty(MPU)affects RMB deviations from covered interest parity(CIP)and how this effect is influenced by China’s capital controls,the RMB exchange rate regime,and international reserves that constrain the transmitting channel of US MPU shocks.Our findings show that US MPU has a spill-over effect and creates deviations from RMB CIP.Capital controls insulate uncertainty shocks and alleviate the US MPU spill-over effect.There are some evidence that inter-national reserves alleviate and the liberalised RMB exchange rate regime magnifies the spill-over effect.However,their effects become insignificant in the presence of capital controls.Moreover,the US MPU effect on RMB CIP deviations becomes prominent after the 2008 global financial crisis.

China's Rapid Accumulation of Foreign Exchange Reserves and Its Policy Implications

In late February 2006, China surpassed Japan to become the world＇s largest holder of foreign exchange reserves. Beijing is now faced with the growing challenge of how to handle these vast reserves effectively. Although China＇s soaring foreign exchange reserves indicate that its overall strength has grown, they have created internal and external pressures on the balance of the economy, and introduced risks to the financial system. It is estimated in the present study that foreign exchange reserves of approximately US$ 400bn in 2005 would have been appropriate under circumstances of a managed floating exchange rate regime and capital control. China ＇s actual reserves have far exceeded its normal demand. The objective of China is to maintain an optimal level that maximizes net benefits as a whole, Four main policv options are available for China to achieve its target： spending and investing foreign exchange reserves, gradual liberalization of the capital account, diversification of foreign exchange reserves and a switch in holders of foreign exchange reserves. Spending and investing in foreign exchange reserves can be undertaken in combination with liberalization in the capital account, given careful consideration of the risks involved. Liberalization should be extensive but gradual so that companies and individuals can adjust to changes in financial markets and manage portfolios while avoiding unnecessary risks.

Effectiveness of China’s Monetary Policy and Reform of Its Foreign Exchange System

This paper examines the effectiveness of China＇s monetary policy in curbing the overheating and speculation problems under the current foreign exchange system. The paper stresses the necessity of capital controls in China＇s gradual foreign exchange reform and the importance of credible government policy in guiding market expectations. Also, the paper discusses the persistence of China＇s external imbalance, and provides policy recommendations for its reduction.

Contagion or Real Linkages? Some Evidence from China's Emerging Parallel Markets

This paper empirically tests the existence of contagion using data on China ＇ s five parallel markets with different entry barriers for foreign capital. Taking the 1997 stock market crash as our experiment and using data on A, B and H shares, red chips and American depository receipts, the present paper tests whether these China-backed market returns respond differently to foreign shocks during the pre-1997 and post-1997 crash period. Evidence suggests that the contagion effects are stronger in markets with fewer entry barriers. An important implication of our findings is that countries vulnerable to contagion could be justified to impose some limits on capital flows.