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

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  • Vincent Bouvatier

    (Universite Paris 1)

Abstract

Non-foreign direct investment capital inflows in China were particularly strong in 2003 and 2004. They were even stronger than current account surpluses or net foreign direct investment inflows. As a result, the pace of international reserves accumulation in China increased significantly. This paper investigates if the rapid build up of international reserves in 2003 and 2004 was a source of monetary instability in China. The relationship between international reserves and domestic credit is examined with a Vector Error Correction Model (VECM), estimated on monthly data from March 1995 to December 2005. Empirical results show that this relationship was stable and consistent with monetary stability. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this monetary stability

Suggested Citation

  • Vincent Bouvatier, 2007. "Hot Money Inflows and Monetary Stability in China: How the People's Bank of China Took up the Challenge," Money Macro and Finance (MMF) Research Group Conference 2006 161, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc06:161
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    Cited by:

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    2. Agyenim Boateng & Vu Hong Thai Nguyen & Min Du & Frank O. Kwabi, 2022. "The impact of CEO compensation and excess reserves on bank risk-taking: the moderating role of monetary policy," Empirical Economics, Springer, vol. 62(4), pages 1575-1598, April.
    3. Tsai, I-Chun & Chiang, Ming-Chu & Tsai, Huey-Cherng & Liou, Chia-Ho, 2014. "Hot money effect or foreign exchange exposure? Investigation of the exchange rate exposures of Taiwanese industries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 75-96.
    4. Ohno, Sanae & Shimizu, Junko, 2015. "Do exchange rate arrangements and capital controls influence international capital flows and housing prices in Asia?," Journal of Asian Economics, Elsevier, vol. 39(C), pages 1-18.
    5. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.
    6. Thai V. H. Nguyen & Agyenim Boateng & Tra Thi Thu Pham, 2019. "Involuntary excess reserve and heterogeneous transmission of policy rates to bank lending rates in China," Empirical Economics, Springer, vol. 57(3), pages 1023-1044, September.
    7. Mingming Li & Fengming Qin & Zhaoyong Zhang, 2021. "Short-Term Capital Flows, Exchange Rate Expectation and Currency Internationalization: Evidence from China," JRFM, MDPI, vol. 14(5), pages 1-15, May.

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    More about this item

    Keywords

    hot money inflows; international reserves; VECM; Granger causality;
    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

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