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Hot Money Inflows in China: How the People's Bank of China Took up the Challenge

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  • Vincent Bouvatier

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.

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  • Vincent Bouvatier, 2006. "Hot Money Inflows in China: How the People's Bank of China Took up the Challenge," Post-Print halshs-00111153, HAL.
  • Handle: RePEc:hal:journl:halshs-00111153
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00111153
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    Cited by:

    1. Gunther Schnabl, 2019. "China's Overinvestment and International Trade Conflicts," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 27(5), pages 37-62, September.
    2. Glick, Reuven & Hutchison, Michael, 2009. "Navigating the trilemma: Capital flows and monetary policy in China," Journal of Asian Economics, Elsevier, vol. 20(3), pages 205-224, May.
    3. Gunther Schnabl, 2011. "The role of the chinese dollar peg for macroeconomic stability in China and the world economy," Global Financial Markets Working Paper Series 13-2010, Friedrich-Schiller-University Jena.

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    More about this item

    Keywords

    Hot money inflows; domestic credit; VECM; Granger causality; Capitaux spéculatifs; crédit domestique; causalité à la Granger;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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