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The effects of U.S. monetary policy surprises on China’s gross portfolio flows and capital control responses

Author

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  • Zhou, Jinnan
  • Wang, Lirong
  • Hueng, C. James
  • Wei, Wan

Abstract

Studies finding no role of U.S. monetary policy surprises on China’s net portfolio inflows conjecture that this insularity stems from China’s capital controls. We construct a measure of China’s capital control to empirically test this claim. Neither U.S. monetary policy surprises nor China’s capital control significantly affect China’s net portfolio inflows. However, dichotomizing net inflows into gross foreign inflows and gross domestic outflows reveals that contractionary U.S. monetary policy surprises do reduce both foreigners’ portfolio inflows to China and Chinese residents’ portfolio outflows, consistent with global retrenchment as U.S. contractionary policies reduce global liquidity and asset values. These impacts offset each other, yielding the insignificant net effect. Additionally, China’s regulations on foreigners and residents can mitigate the impacts of U.S. monetary policy surprises on gross portfolio flows. Facing the global financial cycle, China’s capital controls reshape the transmission of U.S. monetary shocks, providing policymakers with tools to manage external influences.

Suggested Citation

  • Zhou, Jinnan & Wang, Lirong & Hueng, C. James & Wei, Wan, 2026. "The effects of U.S. monetary policy surprises on China’s gross portfolio flows and capital control responses," Economic Analysis and Policy, Elsevier, vol. 93(C), pages 112-124.
    • Handle: RePEc:eee:ecanpo:v:93:y:2026:i:c:p:112-124
    DOI: 10.1016/j.eap.2026.07.023
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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