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The implications for trade and FDI flows from liberalisation of China's capital account

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  • George Verikios

Abstract

We model the partial liberalisation of the capital account by China using a dynamic CGE model of the world economy. Our results indicate that a reduced capital controls on FDI would lead to a significant increase in FDI capital in China and a significant reduction in the cost of capital in China relative to the rest of the world. Further, we observe an increase in capital stocks in all regions, which benefits all regions in terms of GDP and GNP. The economies of China (1.7%), East Asia (1.3%) and Australia/New Zealand (0.5%) grow most strongly. The rental price of capital falls significantly in these regions, which lowers domestic costs and they experience a real depreciation of the exchange rate and thus increased exports relative to other regions. We also observe an across-the-board increase in the saving rate driven by the rise in the price of consumption relative to investment (saving) in all regions.

Suggested Citation

  • George Verikios, 2015. "The implications for trade and FDI flows from liberalisation of China's capital account," Centre of Policy Studies/IMPACT Centre Working Papers g-251, Victoria University, Centre of Policy Studies/IMPACT Centre.
  • Handle: RePEc:cop:wpaper:g-251
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Takeshi Tashiro, 2013. "Crowding out redefined: the role of reserve accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-43.
    2. Vincent, David P & Dixon, Peter B & Powell, Alan A, 1980. "The Estimation of Supply Response in Australian Agrucilture: The CRESH/CRETH Production System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 221-242, February.
    3. Yin-Wong Cheung & Risto Herrala, 2014. "China's Capital Controls: Through the Prism of Covered Interest Differentials," Pacific Economic Review, Wiley Blackwell, vol. 19(1), pages 112-134, February.
    4. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2014. "Growing (with Capital Controls) like China," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(3), pages 327-370, August.
    5. Tahsin Saadi Sedik & Tao Sun, 2012. "Effects of Capital Flow Liberalization; What is the Evidence from Recent Experiences of Emerging Market Economies?," IMF Working Papers 12/275, International Monetary Fund.
    6. Bénassy-Quéré, Agnès & Carton, Benjamin & Gauvin, Ludovic, 2013. "China and global rebalancing: A two-country approach," China Economic Review, Elsevier, vol. 26(C), pages 118-139.
    7. Lakatos, Csilla & Fukui, Tani, 2014. "The Liberalization of Retail Services in India," World Development, Elsevier, vol. 59(C), pages 327-340.
    8. Christen, Elisabeth & Francois, Joseph & Hoekman, Bernard, 2012. "CGE modeling of market access in services," Policy Research Working Paper Series 6106, The World Bank.
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    11. Eswar S Prasad & Qing Wang & Thomas Rumbaugh, 2005. "Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China," IMF Policy Discussion Papers 05/1, International Monetary Fund.
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    Cited by:

    1. George Verikios, 2018. "Capital Account Liberalisation by China and the Effects on Global FDI and Trade," Global Economic Review, Taylor & Francis Journals, vol. 47(3), pages 245-269, July.

    More about this item

    Keywords

    capital controls; China; computable general equilibrium; FDI; multinational firms; trade;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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