Dynamic interactions between real exchange rate and international fund flows in China

Abstract

As the progress of capital account liberalization in China, the volume and volatility of international fund flows has increased significantly since 2000. Therefore, it is of vital importance to investigate their influence on domestic financial market. Based on a novel database, EPFR Global, we get the monthly fund flows in China from January 2005 to June 2013. Vector autoregression (VAR) models are employed to investigate the dynamic relationships between real exchange rate and international fund flows.The following conclusions can be drawn: (i) large amount of international fund investments tend to result in RMB appreciation; (ii) the appreciation of real effective exchange rate leads to the decrease of fund flows in the first month and attracts more fund investments afterwards; (iii) the interaction between equity flows and exchange rate is more significant than bond flows.