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Why is capital flowing out of China?

  • Ljungwall, Christer
  • Wang, Zijian
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    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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    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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    1. Cuddington, John T., 1987. "Capital flight ," European Economic Review, Elsevier, vol. 31(1-2), pages 382-388.
    2. Léonce Ndikumana, 2002. "Public Debts and Private Assets:Explaining Capital Flight from Sub-Saharan African Countries," Working Papers wp32, Political Economy Research Institute, University of Massachusetts at Amherst.
    3. Hermes, Niels & Lensink, Robert, 2001. "Capital flight and the uncertainty of government policies," Economics Letters, Elsevier, vol. 71(3), pages 377-381, June.
    4. Pastor, Manuel Jr., 1990. "Capital flight from Latin America," World Development, Elsevier, vol. 18(1), pages 1-18, January.
    5. Terry Sicular, 1998. "Capital Flight and Foreign Investment: Two Tales From China and Russia," The World Economy, Wiley Blackwell, vol. 21(5), pages 589-602, 07.
    6. David F. Hendry & Katarina Juselius, 2000. "Explaining Cointegration Analysis: Part 1," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-42.
    7. 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.
    8. 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.
    9. 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.
    10. 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.).
    11. 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.
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