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A Model of Chinese Capital Account Liberalisation

Author

Listed:
  • Dong He

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

  • Paul Luk

    (Hong Kong Institute for Monetary Research)

Abstract

In shaping the evolution of the global financial system in the decade ahead, few events will likely be more significant than capital account liberalisation in China and the internationalisation of the renminbi. This paper provides a theory-based enquiry into the contours of China's international balance sheets after the renminbi becomes convertible under the capital account. We construct a two-country general equilibrium model with trading in equities and bonds and calibrate the model with US and Chinese data. We interpret Chinese capital account liberalisation as a removal of restrictions that prohibit agents from trading Chinese bonds and US equities. We explore how international risk-sharing can be achieved through portfolio diversification in each of these asset market configurations. We also look at how these holdings would change as China gradually rebalances its production with a higher share of labour income, and as the productivity gap between China and the US narrows. We find that both US and Chinese residents would have incentives to increase their holdings in each other's equities, and to issue debt in each other's currency. We interpret the latter observation as the co-existence of the US dollar and the renminbi as major international currencies.

Suggested Citation

  • Dong He & Paul Luk, 2013. "A Model of Chinese Capital Account Liberalisation," Working Papers 122013, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:122013
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    References listed on IDEAS

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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 & 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.
    3. Laureen Albarrán Díaz de León & Jerjes Aguirre Ochoa, 2014. "Analyzing Organized Crime From A Business Perspective: The Case Of Mexican Meth Mafia," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 4(9), pages 977-990, September.
    4. 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.

    More about this item

    Keywords

    China; Country Portfolios; Capital Account Liberalization; Renminbi Internationalization;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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