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China's capital controls : Through the prism of covered interest differentials

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  • Cheung, Yin-Wong
  • Herrala, Risto

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. Keywords: NDF implied RMB interest rate, capital controls, asymmetric response, macro determinants, credit market tightness JEL: E44, F31, F32.

Suggested Citation

  • Cheung, Yin-Wong & Herrala, Risto, 2013. "China's capital controls : Through the prism of covered interest differentials," BOFIT Discussion Papers 22/2013, Bank of Finland, Institute for Economies in Transition.
  • Handle: RePEc:bof:bofitp:2013_022
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    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 17:12:18

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    3. Liu, Tao, 2014. "The onshore-offshore interaction of RMB market: a high-frequency analysis," MPRA Paper 63905, University Library of Munich, Germany.
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    More about this item

    Keywords

    ndf implied rmb interest rate; capital controls; asymmetric response; macro determinants; credit market tightness jel: e44; f31; f32.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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