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The Chinese Approach to Capital Inflows

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  • Shang-Jin Wei
  • Eswar Prasad

Abstract

In this paper, we adopt a cross-country perspective to examine the evolution of capital flows into China, both in terms of volumes and composition. China''s inflows have generally been dominated by foreign direct investment (FDI), a pattern that appears to be favorable in light of the recent literature on the experiences of developing countries with financial globalization. We provide a detailed documentation of the evolution of China''s capital controls, a proximate determinant of the pattern of capital inflows. We also discuss a number of other intriguing hypotheses that attempt to capture the "deeper" causes underlying China''s approach to capital flows. In particular, we argue that some popular mercantilist-type arguments are inconsistent with the facts. We also analyze the recent rapid rise of China''s international reserves and discuss its implications. Contrary to some popular perceptions, the dramatic surge in foreign exchange reserves since 2001 is mainly attributable to non-FDI capital inflows, rather than current account surpluses or FDI.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/79.

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Length: 61
Date of creation: 01 Apr 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/79

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Keywords: Foreign direct investment; External debt; Capital controls; Foreign investment; Capital inflows; fdi; foreign exchange; direct investment; foreign capital; capital flows; foreign exchange reserves; treasury securities; foreign currency; foreign investors; capital markets; capital account liberalization; composition of capital inflows; net capital flows; international investors; net capital; international capital; direct investment inflows; current account balance; portfolio investment; foreign banks; foreign bonds; commercial credits; foreign exchange reserve; capital market; international capital flows; capital account transactions; foreign enterprises; working capital; industrial country; world capital markets; foreign securities; capital movements; domestic capital; tax incentives; capital transactions; international trade; industrial countries; capital account restrictions; equity investment; marketable securities; global capital flows; investment climate; foreign bank; capital losses; access to international financial markets; capital account convertibility; foreign investor; foreign ownership; insider trading; foreign governments; debt securities; capital outflows; international capital markets; foreign exchange position; capital market securities; capital loss; private capital inflows; unrecorded capital flows; equity securities; international investment; access to international capital markets; cost of capital; access to international capital; capital accounts; securities companies; foreign companies; industrial economies; corporate bonds; private capital; domestic capital markets; stock exchange; securities dealers; foreign exchange reserve holdings; stock market; market size; government bonds; foreign trade; speculative attacks; capital remains; foreign enterprise; foreign corporations; foreign exchange positions; securities exchange; subsidiaries; dollar bonds; foreign technology; foreign technologies; moral hazard; foreign investment income; external capital; domestic securities; government securities; stock exchanges; foreign capitals; liquid asset; foreign branch; domestic borrowers; foreign currencies; foreign assets; international settlements; foreign nationals; foreign capital participation;

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References

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  1. Ashoka Mody & Antu Panini Murshid, 2002. "Growing Up with Capital Flows," IMF Working Papers 02/75, International Monetary Fund.
  2. Classens, S. & Dooley, M.P. & Warner, A., 1995. "Portfolio Capital Flows: Hot or Cold," Papers 501, Harvard - Institute for International Development.
  3. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  4. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy," IMF Occasional Papers 232, International Monetary Fund.
  5. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications 4203, Inter-American Development Bank, Research Department.
  6. Aizenman, Joshua & Marion, Nancy P., 2003. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Santa Cruz Department of Economics, Working Paper Series qt9s7978n1, Department of Economics, UC Santa Cruz.
  7. Michael Funke & Jörg Rahn, 2005. "Just how Undervalued is the Chinese Renminbi," Quantitative Macroeconomics Working Papers 20504, Hamburg University, Department of Economics.
  8. Julan Du & Shang-Jin Wei, 2004. "Does Insider Trading Raise Market Volatility?," Economic Journal, Royal Economic Society, vol. 114(498), pages 916-942, October.
  9. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries," IMF Occasional Papers 220, International Monetary Fund.
  10. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  11. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity," IMF Working Papers 01/2, International Monetary Fund.
  12. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
  13. Morris Goldstein & Nicholas R. Lardy, 2005. "China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity," Working Paper Series WP05-2, Peterson Institute for International Economics.
  14. Gunter, Frank R., 2004. "Capital flight from China: 1984-2001," China Economic Review, Elsevier, vol. 15(1), pages 63-85, January.
  15. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  16. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  17. Wei, Shang-Jin, 2001. "Domestic Crony Capitalism and International Fickle Capital: Is There a Connection?," International Finance, Wiley Blackwell, vol. 4(1), pages 15-45, Spring.
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