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China's Capital Controls - Through the Prism of Covered Interest Differentials

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  • Yin-Wong Cheung
  • Risto Herrala

Abstract

We study the renminbi (RMB) covered interest differential – an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China’s policy.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4377.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4377

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Keywords: NDF implied RMB interest rate; capital controls; asymmetric response; macro determinants; credit market tightness;

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  1. Yin-Wong Cheung & Risto Herrala, 2013. "China's Capital Controls - Through the Prism of Covered Interest Differentials," CESifo Working Paper Series 4377, CESifo Group Munich.
  2. Paolo Mauro, 2000. "Emerging Market Spreads: Then Versus Now," Economics Series Working Papers 2001-FE-03, University of Oxford, Department of Economics.
  3. Aizenman, Joshua & Sengupta, Rajeswari, 2011. "The financial trilemma in China and a comparative analysis with India," MPRA Paper 34485, University Library of Munich, Germany.
  4. Joshua Aizenman & Rajeswari Sengupta, 2013. "Financial Trilemma in China and a Comparative Analysis with India," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 18(2), pages 123-146, 05.
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  6. Cheung, Yin-Wong & Chinn, Menzie D. & Fujii, Eiji, 2006. "The Chinese economies in global context: The integration process and its determinants," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 128-153, March.
  7. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
  8. Dong He & Lillian Cheung & Wenlang Zhang & Tommy Wu, 2012. "How would Capital Account Liberalisation Affect China's Capital Flows and the Renminbi Real Exchange Rates?," Working Papers, Hong Kong Institute for Monetary Research 092012, Hong Kong Institute for Monetary Research.
  9. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers, Wisconsin Madison - Social Systems 4, Wisconsin Madison - Social Systems.
  10. Yin-Wong Cheung & Xingwang Qian, 2010. "Capital Flight: China's Experience," CESifo Working Paper Series 2931, CESifo Group Munich.
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  12. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
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  14. Jeffrey A. Frankel & Charles Engel, 1982. "Do Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Test," NBER Working Papers 1051, National Bureau of Economic Research, Inc.
  15. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. China's Capital Controls and the Exchange Rate Regime
    by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-08-28 12:12:18
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Cited by:
  1. Yin-Wong Cheung & Risto Herrala, 2013. "China's Capital Controls - Through the Prism of Covered Interest Differentials," CESifo Working Paper Series 4377, CESifo Group Munich.
  2. Cheung, Yin-Wong, 2014. "The Role of Offshore Financial Centers in the Process of Renminbi Internationalization," ADBI Working Papers, Asian Development Bank Institute 472, Asian Development Bank Institute.

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