IDEAS home Printed from https://ideas.repec.org/p/iis/dispap/iiisdp174.html
   My bibliography  Save this paper

The International Financial Integration of China and India

Author

Listed:
  • Philip R. Lane
  • Sergio L. Schmukler

Abstract

Three main features characterize the international financial integration of China and India . First, while only having a small global share of privately-held external assets and liabilities (with the exception of China 's FDI liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are “short equity, long debt .” Third, China and India have improved their net external positions over the last decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies; domestic financial sector policies; and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset/liability holdings) and, consequently, the international financial system.

Suggested Citation

  • Philip R. Lane & Sergio L. Schmukler, 2006. "The International Financial Integration of China and India," The Institute for International Integration Studies Discussion Paper Series iiisdp174, IIIS.
    • Handle: RePEc:iis:dispap:iiisdp174
    as

    Download full text from publisher

    File URL: https://www.tcd.ie/triss/assets/PDFs/iiis/iiisdp174.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Wei, Shang-Jin & Boyreau-Debray, Genevieve, 2004. "Pitfalls of a State-Dominated Financial System: The Case of China," CEPR Discussion Papers 4471, C.E.P.R. Discussion Papers.
    2. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    3. Jong-Wha Lee & Warwick J. McKibbin, 2007. "Domestic Investment And External Imbalances In East Asia," CAMA Working Papers 2007-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
    5. Mr. Eswar S Prasad & Raghuram Rajan, 2005. "Controlled Capital Account Liberalization: A Proposal," IMF Policy Discussion Papers 2005/007, International Monetary Fund.
    6. Hans Fehr & Sabine Jokisch & Laurence J Kotlikoff, 2006. "Will China Eat Our Lunch or Take Us to Dinner? Simulating the Transition Paths of the US, EU, Japan and China," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Anna Park & Daniel Rees (ed.),Demography and Financial Markets, Reserve Bank of Australia.
    7. Kochhar, Kalpana & Kumar, Utsav & Rajan, Raghuram & Subramanian, Arvind & Tokatlidis, Ioannis, 2006. "India's pattern of development: What happened, what follows?," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 981-1019, July.
    8. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    9. Shah, Ajay & Fernandes, Kshama, 2000. "The relevance of index funds for pension investment in equities," Policy Research Working Paper Series 2494, The World Bank.
    10. Maurice Obstfeld, 2007. "The Renminbi's Dollar Peg at the Crossroads," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 29-56, December.
    11. Dany Jaimovich & Ugo Panizza, 2010. "Public debt around the world: a new data set of central government debt," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 19-24, January.
    12. Jianping Mei & Jose A. Scheinkman & Wei Xiong, 2009. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 225-255, November.
    13. Bhagwati, Jagdish N, 1982. "Directly Unproductive, Profit-seeking (DUP) Activities," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 988-1002, October.
    14. Barry Eichengreen & Pipat Luengnaruemitchai, 2006. "Why doesn’t Asia have bigger bond markets?," BIS Papers chapters, in: Bank for International Settlements (ed.), Asian bond markets: issues and prospects, volume 30, pages 40-77, Bank for International Settlements.
    15. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
    16. Eswar Prasad & Shang-Jin Wei, 2007. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 421-480, National Bureau of Economic Research, Inc.
    17. Kaminsky, Graciela Laura & Schmukler, Sergio L., 2002. "Short-run pain, long-run gain : the effects of financial liberalization," Policy Research Working Paper Series 2912, The World Bank.
    18. Jiandong Ju & Shang-Jin Wei, 2014. "A Solution to Two Paradoxes of International Capital Flows," Economic and Political Studies, Taylor & Francis Journals, vol. 2(1), pages 3-43, January.
    19. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
    20. Rodrik, Dani, 2005. "Growth Strategies," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 14, pages 967-1014, Elsevier.
    21. Aaron Tornell, 2005. "Systemic Crises and Growth (September 2006)," UCLA Economics Online Papers 359, UCLA Department of Economics.
    22. Valerie Cerra & Sweta Chaman Saxena, 2002. "What Caused the 1991 Currency Crisis in India?," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 1-5.
    23. Kenneth M. Kletzer, 2004. "Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 1(1), pages 227-275.
    24. Olivier Blanchard & Francesco Giavazzi, 2006. "Rebalancing Growth in China: A Three‐Handed Approach," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(4), pages 1-20, August.
    25. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
    26. Hans Fehr & Sabine Jokisch & Laurence J. Kotlikoff, 2005. "Will China Eat Our Lunch or Take Us Out to Dinner? Simulating the Transition Paths of the U.S., EU, Japan, and China," NBER Working Papers 11668, National Bureau of Economic Research, Inc.
    27. McKinnon Ronald I, 2006. "China's New Exchange Rate Policy: Will China Follow Japan into a Liquidity Trap?," The Economists' Voice, De Gruyter, vol. 3(5), pages 1-7, April.
    28. Eichengreen, Barry & Park, Yung Chul, 2003. "Why Has There Been Less Financial Integration In Asia Than In Europe?," Institute of European Studies, Working Paper Series qt6823v94w, Institute of European Studies, UC Berkeley.
    29. Sharma, Kishor, 2000. "Export Growth In India: Has FDI Played a Role?," Center Discussion Papers 28372, Yale University, Economic Growth Center.
    30. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    31. Dani Rodrik, 2006. "Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank's Economic Growth in the 1990s: Learning from a Decade of Reform," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 973-987, December.
    32. Marvin Goodfriend & Eswar Prasad, 2009. "A Framework for Independent Monetary Policy in China," Chapters, in: Gill Hammond & Ravi Kanbur & Eswar Prasad (ed.), Monetary Policy Frameworks for Emerging Markets, chapter 8, Edward Elgar Publishing.
    33. Kishor Sharma, 2000. "Export Growth in India: Has FDI Played a Role," Working Papers 816, Economic Growth Center, Yale University.
    34. Francis E. Warnock & Veronica C. Warnock, 2005. "International Capital Flows and U.S. Interest Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp103, IIIS.
    35. Barry Eichengreen, 2010. "Global Imbalances and the Lessons of Bretton Woods," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262514141, December.
    36. Allen, Franklin & Chakrabarti, Rajesh & De, Sankar & Qian, Jun “QJ” & Qian, Meijun, 2012. "Financing firms in India," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 409-445.
    37. Eichengreen, Barry & Tong, Hui, 2007. "Is China's FDI coming at the expense of other countries?," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 153-172, June.
    38. Philippe Aghion & Steven Durlauf (ed.), 2005. "Handbook of Economic Growth," Handbook of Economic Growth, Elsevier, edition 1, volume 1, number 1.
    39. Mr. Ayhan Kose & Mr. Kenneth Rogoff & Mr. Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 2003/007, International Monetary Fund.
    40. Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136, National Bureau of Economic Research, Inc.
    41. Ajay Shah, 1995. "The Indian IPO Market: Empirical Facts," Finance 9507003, University Library of Munich, Germany.
    42. Morris Goldstein & Nicholas R. Lardy, 2005. "China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity," Working Paper Series WP05-2, Peterson Institute for International Economics.
    43. Dossani, Rafiq & Kenney, Martin, 2002. "Creating an Environment for Venture Capital in India," World Development, Elsevier, vol. 30(2), pages 227-253, February.
    44. Jeffrey Frankel, 2006. "On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," CESifo Economic Studies, CESifo Group, vol. 52(2), pages 246-275, June.
    45. Romain Rancière & Aaron Tornell & Frank Westermann, 2008. "Systemic Crises and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 359-406.
    46. Hausmann, Ricardo & Lim, Edwin & Spence, Michael, 2006. "China and the Global Economy: Medium-Term Issues and Options--A Synthesis Report," Working Paper Series rwp06-029, Harvard University, John F. Kennedy School of Government.
    47. Kletzer, Kenneth M., 2005. "Liberalizing Capital flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms," India Policy Forum, National Council of Applied Economic Research, vol. 1(1), pages 227-275.
    48. Guonan Ma & Robert N McCauley, 2002. "Rising foreign currency liquidity of banks in China," BIS Quarterly Review, Bank for International Settlements, September.
    49. Benoît Mercereau, 2005. "FDI Flows to Asia: Did the Dragon Crowd Out the Tigers?," IMF Working Papers 2005/189, International Monetary Fund.
    50. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    51. Andong Zhu & Chunxiang Li & Gerald Epstein, 2005. "Capital Flight from China, 1982-2001," Chapters, in: Gerald A. Epstein (ed.), Capital Flight and Capital Controls in Developing Countries, chapter 10, pages 262-286, Edward Elgar Publishing.
    52. Sharma, K., 2000. "Export Growth in India: Has FDI Played a Role?," Papers 816, Yale - Economic Growth Center.
    53. Mr. Eswar S Prasad, 2004. "China's Growth and Integration into the World Economy: Prospects and Challenges," IMF Occasional Papers 2004/006, International Monetary Fund.
    54. Dr James Laurenceson, 2002. "External Financial Liberalization and Foreign Debt in China," Discussion Papers Series 304, School of Economics, University of Queensland, Australia.
    55. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    56. Mr. Joshua Aizenman & Mr. Jaewoo Lee, 2005. "International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence," IMF Working Papers 2005/198, International Monetary Fund.
    57. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 609-644, National Bureau of Economic Research, Inc.
    58. Gunter, Frank R., 2004. "Capital flight from China: 1984-2001," China Economic Review, Elsevier, vol. 15(1), pages 63-85, January.
    59. Corbett, Jenny & Jenkinson, Tim, 1996. "The Financing of Industry, 1970-1989: An International Comparison," Journal of the Japanese and International Economies, Elsevier, vol. 10(1), pages 71-96, March.
    60. Kuijs, Louis, 2005. "Investment and saving in China," Policy Research Working Paper Series 3633, The World Bank.
    61. repec:idb:brikps:9167 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. L. Alan Winters & Shahid Yusuf, 2007. "Dancing with the Giants: China, India, and the Global Economy," World Bank Publications - Books, The World Bank Group, number 6632.
    2. Philip Lane & Sergio Schmukler, 2007. "The Evolving Role of China and India in the Global Financial System," Open Economies Review, Springer, vol. 18(4), pages 499-520, September.
    3. Herrmann, Sabine & Winkler, Adalbert, 2009. "Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 100-123, August.
    4. Vipin Arora & Rod Tyers & Ying Zhang, 2014. "Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving," Economics Discussion / Working Papers 14-24, The University of Western Australia, Department of Economics.
    5. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    6. Dollar, David & Kraay, Aart, 2006. "Neither a borrower nor a lender: Does China's zero net foreign asset position make economic sense?," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 943-971, July.
    7. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.
    8. Luigi Bonatti & Andrea Fracasso, 2009. "The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting," Department of Economics Working Papers 0905, Department of Economics, University of Trento, Italia.
    9. Eswar Prasad & Shang-Jin Wei, 2007. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 421-480, National Bureau of Economic Research, Inc.
    10. Joshua Aizenman, 2015. "Internationalization of the RMB, Capital Market Openness and Financial Reforms in China," Pacific Economic Review, Wiley Blackwell, vol. 20(3), pages 444-460, August.
    11. Antoine Bouveret & Sana Mestiri & Henri Sterdyniak, 2006. "The Renminbi Equilibrium Exchange Rate: an agnostic view," SciencePo Working papers Main hal-01073825, HAL.
    12. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
    13. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4283-4359, Elsevier.
    14. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 290-320, September.
    15. Pingfan Hong & Rob Vos & Keping Yao, 2008. "How China Could Contribute to a Benign Global Rebalancing?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(5), pages 35-50, September.
    16. Mariam Camarero & Josep Lluís Carrion‐i‐Silvestre & Cecilio Tamarit, 2021. "External imbalances from a GVAR perspective," The World Economy, Wiley Blackwell, vol. 44(11), pages 3202-3245, November.
    17. Juann H. Hung & Rong Qian, 2010. "Why Is China's Saving Rate So High? A Comparative Study of Cross-Country Panel Data: Working Paper 2010-07," Working Papers 21920, Congressional Budget Office.
    18. Tyers, Rod, 2015. "International effects of China's rise and transition: Neoclassical and Keynesian perspectives," Journal of Asian Economics, Elsevier, vol. 37(C), pages 1-19.
    19. Mendoza, Ronald U., 2010. "Was the Asian crisis a wake-up call?: Foreign reserves as self-protection," Journal of Asian Economics, Elsevier, vol. 21(1), pages 1-19, February.
    20. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 143-197.

    More about this item

    Keywords

    Financial integration; capital flows; China; India; world economy;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iis:dispap:iiisdp174. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Maeve (email available below). General contact details of provider: https://edirc.repec.org/data/cetcdie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.