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A Structural Measurement of the Valuation Effect of China's External Assets: Method and Application

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  • Guowei Cai
  • Xiaowei Chen
  • Xun Wang

Abstract

Existing research on the measurement of the valuation effect mainly follows the residual method proposed by Lane and Milesi‐Ferretti (2001). This cannot be used to perform structural decomposition. We propose an aggregation approach rather than the residual method to measure structurally the investment flow and valuation effect of China's external assets. The results indicate that the valuation effect of China's external assets has been highly volatile and it was negative during the pandemic period. The structural decomposition shows that portfolio investment and direct investment made the main contributions to the valuation effect. The impact of exchange rates on the valuation effect has generally been higher than that of asset price in terms of direct investment and total external assets but the opposite has been true for portfolio investment. China's outward investments are currently more inclined to Asian countries and a few European countries but inflows to China still mainly come from developed countries.

Suggested Citation

  • Guowei Cai & Xiaowei Chen & Xun Wang, 2024. "A Structural Measurement of the Valuation Effect of China's External Assets: Method and Application," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(2), pages 97-124, March.
    • Handle: RePEc:bla:chinae:v:32:y:2024:i:2:p:97-124
    DOI: 10.1111/cwe.12527
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