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Why is capital flowing out of China?

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  • Ljungwall, Christer
  • Wang, Zijian
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    Abstract

    Using quarterly balance-of-payment data over the period 1993:1-2003:4, this paper examines the determinants of China's capital flight. The long run relationship and dynamic interactions among the variables are examined using cointegration and innovation accounting methodology. We find that changes in external debts spur changes in capital flight, implying that China's capital flight is virtually financed by foreign borrowings. On the contrary, real GDP growth and rising foreign investor confidence are inversely related to capital flight. Thus, capital flight can be curbed only if Chinese authorities equalize financing conditions of local and foreign-related firms, and separate the foreign borrowings that lead to capital flight from regular foreign debt flows.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 19 (2008)
    Issue (Month): 3 (September)
    Pages: 359-372

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    Handle: RePEc:eee:chieco:v:19:y:2008:i:3:p:359-372

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    Web page: http://www.elsevier.com/locate/chieco

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    References

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    1. David F. Hendry & Katarina Juselius, 2001. "Explaining Cointegration Analysis: Part II," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 75-120.
    2. Nathan Sheets, 1995. "Capital flight from the countries in transition: some theory and empirical evidence," International Finance Discussion Papers 514, Board of Governors of the Federal Reserve System (U.S.).
    3. Abul Masih & Rumi Masih, 1998. "A multivariate cointegrated modelling approach in testing temporal causality between energy consumption, real income and prices with an application to two Asian LDCs," Applied Economics, Taylor & Francis Journals, vol. 30(10), pages 1287-1298.
    4. Terry Sicular, 1998. "Capital Flight and Foreign Investment: Two Tales from China and Russia," UWO Department of Economics Working Papers 9803, University of Western Ontario, Department of Economics.
    5. Bhattacharya, Rina, 1999. "Capital flight under uncertainty about domestic taxation and trade liberalization," Journal of Development Economics, Elsevier, vol. 59(2), pages 365-387, August.
    6. Boyce, James K., 1992. "The revolving door? External debt and capital flight: A Philippine case study," World Development, Elsevier, vol. 20(3), pages 335-349, March.
    7. Cuddington, John T., 1987. "Capital flight ," European Economic Review, Elsevier, vol. 31(1-2), pages 382-388.
    8. Hermes, N. & Lensink, R., 2000. "Capital flight and the uncertainty of government policies," Research Report 00C30, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    9. Léonce Ndikumana & James K. Boyce, 2002. "Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries," UMASS Amherst Economics Working Papers 2002-02, University of Massachusetts Amherst, Department of Economics.
    10. Nathan Sheets, 1996. "Capital flight from the countries in transition: Some empirical evidence," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(3), pages 259-277.
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    Cited by:
    1. Yin-Wong Cheung & XingWang Qian, 2010. "Capital Flight: China's Experience," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 227-247, 05.
    2. Ferrantino, Michael J. & Liu, Xuepeng & Wang, Zhi, 2012. "Evasion behaviors of exporters and importers: Evidence from the U.S.–China trade data discrepancy," Journal of International Economics, Elsevier, vol. 86(1), pages 141-157.
    3. Lai, Jennifer /J.T., 2008. "Capital flow to China and the issue of hot money: an empirical investigation," MPRA Paper 32539, University Library of Munich, Germany, revised Sep 2009.
    4. Brada, Josef C. & Kutan, Ali M. & Vukšić, Goran, 2013. "Capital Flight in the Presence of Domestic Borrowing: Evidence from Eastern European Economies," World Development, Elsevier, vol. 51(C), pages 32-46.

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