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

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  • Dong He
  • Lillian Cheung
  • Wenlang Zhang
  • Tommy Wu

Abstract

In this paper we study the determinants of gross capital flows, project the size of China's international investment positions in 2020 and analyse the implications for the renminbi real exchange rates. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of this decade, a timetable consistent with recent proposals by the People's Bank of China. Our analysis shows that China's gross international investment positions 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 incomes 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 liberalisation as capital flows are expected to be two-sided. The renminbi 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.

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File URL: http://hdl.handle.net/10.1111/j.1749-124X.2012.12001.x
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Bibliographic Info

Article provided by Institute of World Economics and Politics, Chinese Academy of Social Sciences in its journal China & World Economy.

Volume (Year): 20 (2012)
Issue (Month): 6 (November)
Pages: 29-54

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Handle: RePEc:bla:chinae:v:20:y:2012:i:6:p:29-54

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Cited by:
  1. Yin-Wong Cheung & Risto Herrala, 2013. "China's Capital Controls - Through the Prism of Covered Interest Differentials," Working Papers 142013, Hong Kong Institute for Monetary Research.
  2. Dong He & Paul Luk, 2013. "A Model of Chinese Capital Account Liberalisation," Working Papers 122013, Hong Kong Institute for Monetary Research.

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