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Why is capital flowing out of China?

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  • Ljungwall, Christer
  • Wang, Zijian

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.

Suggested Citation

  • Ljungwall, Christer & Wang, Zijian, 2008. "Why is capital flowing out of China?," China Economic Review, Elsevier, vol. 19(3), pages 359-372, September.
    • Handle: RePEc:eee:chieco:v:19:y:2008:i:3:p:359-372
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    2. Wu, Bao & Wang, Qi & Fang, Chevy-Hanqing & Tsai, Fu-Sheng & Xia, Yuanze, 2022. "Capital flight for family? Exploring the moderating effects of social connections on capital outflow of family business," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    3. Sebri, Maamar & Dachraoui, Hajer, 2020. "Resources bless BRICS," MPRA Paper 100423, University Library of Munich, Germany.
    4. Ashis Kumar Pradhan & Gourishankar S. Hiremath, 2017. "The Capital Flight From India: A Case Of Missing Woods For Trees?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(02), pages 365-383, January.
    5. Yin‐Wong Cheung & XingWang Qian, 2010. "Capital Flight: China's Experience," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 227-247, May.
    6. Sarah Chan, 2017. "Assessing China’s recent capital outflows: policy challenges and implications," China Finance and Economic Review, Springer, vol. 5(1), pages 1-13, December.
    7. Liew, Siew-Ling, 2016. "Review on Determinants of Capital Flight," MPRA Paper 70445, University Library of Munich, Germany.
    8. 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.
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    15. 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.
    16. Hajer Dachraoui & Mounir Smida & Maamar Sebri, 2020. "Role of capital flight as a driver of sovereign bond spreads in Latin American countries," International Economics, CEPII research center, issue 162, pages 15-33.
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