Regional capital mobility in China: Economic reform with limited financial integration

We examine time-series characteristics of China's capital flows during 1998-2014. More specifically, we employ Kalman filtering state-space models to gauge the relative importance of permanent and transitory components in China's overall foreign direct investment (FDI), equity, bond, other investment and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state-space models, we find that a larger difference between onshore and offshore renminbi interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500's volatility index, in contrast, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and the USA also suggest that these flows are less persistent and more volatile during 1998-2014 than previously found based on 1988-1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.

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“…Jiang (), Lai et al . (), and Chan et al . (, ) examine financial integration among different regions within China.…”

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confidence: 86%

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation

Cai

Dang

Lai

2016

Pacific Economic Review

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“…The institutional environment in China varies across regions because different regions are moving towards a market-oriented economy at different paces (Chen, Firth, Gao, & Rui, 2006;Lai, McNelis, & Yan, 2013). Prior literature documents that regional marketization plays an essential role in affecting the financial practices of Chinese firms, including capital structure (Li, Wang, Cheung, & Jiang, 2011;Li, Yue, & Zhao, 2009), corporate fraud (Chen et al, 2006), dividend payouts (Chen, Jian, & Xu, 2009), investment comovement (Chen et al, 2017), foreign direct investment (Du, Lu, & Tao, 2008) and so forth.…”

Section: H2mentioning

confidence: 99%

Does political pressure matter in bank lending? Evidence from China

Cai

Xu²,

Zeng

2017

Financial Market

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Using provincial data from China between 2002 and 2011, we find substantial evidence indicating a positive association between the growth of bank loans issued by commercial banks and the political pressures faced by provincial leaders. This association is particularly true for state‐owned banks, which are much more politically pressurized than others, but is relatively attenuated in provinces with a more developed banking sector. We also find that bank loans issued under greater political pressures are less commercially oriented and have lower quality. Our findings are robust to a variety of sensitivity analyses and alternative measures of political pressure. Overall, our study contribute to a growing literature emphasizing the role of the political incentives of government officials in fuelling economic growth through credit allocation.

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“…Chan et al (2011a) also find that when one controls for cross-sectional dependence, the degree of capital mobility measured by savings and investment correlation in China improves after 1997. Lai et al (2013) show that interprovincial capital mobility increased slightly after 1997 by employing panel time-varying estimation technique on provincial consumption and net output. Jiang Our main finding is that the degree of capital mobility across regions in China is generally low.…”

Section: Introductionmentioning

confidence: 95%

Regional Capital Mobility in China: An Endogenous Parameter Approach

Lai¹

2015

AEF

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In this paper we empirically evaluate interregional capital mobility in China from 1978 to 2012. We measure the degree of capital mobility as the ability of regions, each as a representative consumer, to engage in intertemporal consumption smoothing through running external imbalances. We estimate a correlated random coefficient model which takes into account the potential correlation of capital mobility with output. Our results show that barriers to capital mobility across regions are still high in China. However, there is a slight increase in capital mobility over time. After 2000, the improvement of the degree of capital mobility becomes stagnant. This may reflect the prevalence of capital market distortion in China.

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Regional capital mobility in China: Economic reform with limited financial integration

Cited by 18 publications

References 27 publications

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation

Does political pressure matter in bank lending? Evidence from China

Regional Capital Mobility in China: An Endogenous Parameter Approach

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