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Estimating China�s de-facto capital account convertibility

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China�s capital account convertibility is presently not well understood. A relatively closed de jure regime sits in contrast with a de facto regime that exhibits distinct signs of being quite open. This paper seeks to shed light on this issue by using an econometric model to predict the level of capital flows that would be expected if China had a fully open capital account. The results show that over 2001-2003, observed capital flows were around 85 percent of the predicted value, suggesting that China�s capital account over a one year time horizon is already quite open. Short run convertibility would expectedly be less than this figure. Thus, the results carry the connotation that the cost of capital controls in terms of allocative inefficiency over the medium and long run is likely to have been modest while some unwarranted short run volatility has been avoided. Nonetheless, the results do not leave room for policy complacency. As China continues to implement its WTO commitments in addition to other arrangements such as the Common Economic Partnership Agreement with Hong Kong, short run convertibility is presently on the rise. This makes implementing policies that are prerequisites for full convertibility a matter of urgency.

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Paper provided by School of Economics, University of Queensland, Australia in its series EAERG Discussion Paper Series with number 0205.

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Handle: RePEc:qld:uqeaer:02

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  1. Mundell, Robert, 2003. "Prospects for an Asian currency area," Journal of Asian Economics, Elsevier, vol. 14(1), pages 1-10, February.
  2. Yin-wong Cheung & Menzie D. Chinn & Eiji Fujii, 2003. "China, Hong Kong, and Taiwan: A Quantitative Assessment of Real and Financial Integration," Working Papers 152003, Hong Kong Institute for Monetary Research.
  3. Chang, Gene Hsin & Shao, Qin, 2004. "How much is the Chinese currency undervalued? A quantitative estimation," China Economic Review, Elsevier, vol. 15(3), pages 366-371.
  4. Eswar Prasad & Shang-Jin Wei, 2005. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Working Papers 11306, National Bureau of Economic Research, Inc.
  5. Dasgupta, Dipak & Ratha, Dilip, 2000. "What factors appear to drive private capital flows to developing countries? and how does official lending respond?," Policy Research Working Paper Series 2392, The World Bank.
  6. Shang-Jin Wei & Eswar Prasad, 2005. "The Chinese Approach to Capital Inflows," IMF Working Papers 05/79, International Monetary Fund.
  7. repec:idb:brikps:9167 is not listed on IDEAS
  8. Wei, Shang-Jin, 1995. "Attracting foreign direct investment: Has China reached its potential?," China Economic Review, Elsevier, vol. 6(2), pages 187-199.
  9. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
  10. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, vol. 17(2), pages 155-184, 06.
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Cited by:
  1. Petar Vujanovic, 2011. "Understanding the Recent Surge in the Accumulation of International Reserves," OECD Economics Department Working Papers 866, OECD Publishing.

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