Valuation effects in China:scale,structure,and its function in external adjustment

At present China’s foreign assets are mainly denominated in foreign currencies,while a large part of foreign liabilities are denominated in domestic currency.Under this situation,the appreciation of domestic currency tends to have negative effects on net foreign assets through the valuation effect channel.This article gives a quantitative estimation of the scale of valuation effects in China and the research results show that the valuation effects in China are negative in the 20 years from 1982 to 2012.Furthermore,the scale of valuation effects has been increasing,which has lowered the scale of China’s net foreign assets.This paper also gives an estimation of the structure of the value effects,and finds that the volatility and the scale of asset price-related valuation effects are larger than that of exchange rate-related valuation effects.The results also show that the exchange rate has played a more and more important role in the fluctuation of value effects.Finally,this paper establishes an econometric model to value the function of valuation effects in the external adjustment and the results show that,during the period of 1981-2012,the role of valuation effects in China’s external adjustment were quite limited,but since 2007,valuation effects have played a more and more important role.

How would Capital Account Liberalization Affect China's Capital Flows and the Renminbi Real Exchange Rates?

In this paper we study the determinants of gross capital flows, project the size of China＇s international investment position in 2020, and analyze the implications for the renminbi real exchange rate if China liberalizes the capital account. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of the current decade, a timetable consistent with recent proposals by the People ＇s Bank of China. Our analysis shows that if the capital account were liberalized, China＇s gross international investment position would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country ＇s GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment income from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalization as capital flows are expected to be two-sided. The renminb i real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners.