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How would Capital Account Liberalisation Affect China's Capital Flows and the Renminbi Real Exchange Rates?

Author

Listed:
  • Dong He

    (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research)

  • Lillian Cheung

    (Hong Kong Monetary Authority)

  • Wenlang Zhang

    (Hong Kong Monetary Authority)

  • Tommy Wu

    (Hong Kong Monetary Authority)

Abstract

In this paper we study the determinants of gross capital flows, project the size of China's international investment positions in 2020 and analyse the implications for the renminbi real exchange rates. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of this decade, a timetable consistent with recent proposals by the People's Bank of China. Our analysis shows that China's gross international investment positions would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country¡¦s GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment incomes from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalisation as capital flows are expected to be two-sided. The renminbi real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners.

Suggested Citation

  • Dong He & Lillian Cheung & Wenlang Zhang & Tommy Wu, 2012. "How would Capital Account Liberalisation Affect China's Capital Flows and the Renminbi Real Exchange Rates?," Working Papers 092012, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:092012
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    Cited by:

    1. Tyers, Rod, 2015. "International effects of China's rise and transition: Neoclassical and Keynesian perspectives," Journal of Asian Economics, Elsevier, pages 1-19.
    2. Rod Tyers, 2015. "Financial Integration and China's Global Impact," Economics Discussion / Working Papers 15-02, The University of Western Australia, Department of Economics.
    3. Söhnke M. Bartram & John M. Griffin & Tae-Hoon Lim & David T. Ng, 2015. "How Important Are Foreign Ownership Linkages for International Stock Returns?," Review of Financial Studies, Society for Financial Studies, pages 3036-3072.
    4. Rod Tyers, 2016. "China and Global Macroeconomic Interdependence," The World Economy, Wiley Blackwell, pages 1674-1702.
    5. Yin-Wong Cheung & Risto Herrala, 2014. "China's Capital Controls: Through the Prism of Covered Interest Differentials," Pacific Economic Review, Wiley Blackwell, pages 112-134.
    6. Paul De Grauwe & Zhaoyong Zhang & Rod Tyers, 2016. "Slower Growth and Vulnerability to Recession: Updating China's Global Impact," Scottish Journal of Political Economy, Scottish Economic Society, pages 66-88.
    7. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 28(2), pages 1-32, November.
    8. Rod Tyers & Ying Zhang, 2014. "Short Run Effects of The Economic Reform Agenda," Economics Discussion / Working Papers 14-16, The University of Western Australia, Department of Economics.
    9. repec:cup:macdyn:v:21:y:2017:i:08:p:1902-1934_00 is not listed on IDEAS
    10. Jane Golley & Rod Tyers & Yixiao Zhou, 2016. "Contractions in Chinese Fertility and Savings: Long-run Domestic and Global Implications," RBA Annual Conference Volume,in: Iris Day & John Simon (ed.), Structural Change in China: Implications for Australia and the World Reserve Bank of Australia.
    11. Li, Jian & Strange, Roger & Ning, Lutao & Sutherland, Dylan, 2016. "Outward foreign direct investment and domestic innovation performance: Evidence from China," International Business Review, Elsevier, vol. 25(5), pages 1010-1019.
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    13. Yiping Huang & Bijun Wang, 2013. "Investing Overseas Without Moving Factories Abroad: The Case of Chinese Outward Direct Investment," Asian Development Review, MIT Press, vol. 30(1), pages 85-107, March.
    14. Vipin Arora & Rod Tyers & Ying Zhang, 2014. "Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving," CAMA Working Papers 2014-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    19. Joyce, Joseph, 2015. "External Balance Sheets as Countercyclical Crisis Buffers," MPRA Paper 66039, University Library of Munich, Germany.

    More about this item

    Keywords

    Capital Account Liberalisation; Net Foreign Asset Position; Exchange Rates;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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