Hostname: page-component-586b7cd67f-g8jcs Total loading time: 0 Render date: 2024-11-26T01:55:15.407Z Has data issue: false hasContentIssue false
  • English
  • Français

A MODEL OF CHINESE CAPITAL ACCOUNT LIBERALIZATION

Published online by Cambridge University Press:  12 April 2016

Dong He  and
Paul Luk
Dong He
Affiliation:
International Monetary Fund
Paul Luk*
Affiliation:
Hong Kong Baptist University
*
Address correspondence to: Paul Luk, Department of Economics, Hong Kong Baptist University, WLB 530, the Wing Lung Bank Building for Business Studies, 34 Renfrew Road, Kowloon Tong, Kowloon, Hong Kong, China; e-mail: paulskluk@hkbu.edu.hk.
Get access Rights & Permissions [Opens in a new window]

Abstract

We provide a theory-based inquiry 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 U.S. and Chinese data. We interpret Chinese capital account liberalization as a removal of restrictions that prohibit agents trading Chinese bonds and U.S. 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 rebalanced its production with a larger share of labor income, and as the productivity gap between China and the United States narrowed. We find that both U.S. and Chinese residents would have incentives to increase their holdings in each other's equities and to issue debt in each other's currency.

Keywords

ChinaCountry PortfoliosCapital Account LiberalizationRenminbi Internationalization
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 8 , December 2017 , pp. 1902 - 1934
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors thank an anonymous referee for helpful comments and advice. We also thank Philippe Bacchetta, David Cook, Pierre-Olivier Gourinchas, Anton Korinek, Matteo Maggiori, Robert McCauley, Helene Rey, Cedric Tille, David Vines, Tommy Wu, Danyang Xie, Juanyi Xu, James Yetman, Wenlang Zhang, Huanhuan Zheng, and the participants at the International Conference on Capital Flows and Safe Assets at Fudan University and at the HKIMR/HKUST Joint Conference on Macroeconomics and International Finance for their helpful discussions. We are grateful to Maggie Fok for her excellent research assistance with the working paper. All errors are our own. Both authors were staff members of the Hong Kong Monetary Authority when preparing the working paper. The views expressed in the paper are those of the authors only, and not necessarily those of the International Monetary Fund or the Hong Kong Monetary Authority.

References

REFERENCES

Bacchetta, P., Benhima, K., and Kalantzis, Y. (2013) Capital controls with international reserve accumulation: Can this be optimal? American Economic Journal: Macroeconomics 5, 229–262.Google Scholar
Backus, K., Kehoe, P., and Kydland, F. (1994) Dynamics of the trade balance and the terms of trade: The J-curve? American Economic Review 84 (1), 84–103.Google Scholar
Baxter, M. and Jermann, U. (1997) The international diversification puzzle is worse than you think. American Economic Review 36 (4), 821–854.Google Scholar
Bayoumi, T. and Ohnsorge, F. (2013) Do Inflows or Outflows Dominate? Global Implications of Capital Account Liberalisation in China. IMF working paper 13/189.Google Scholar
Bils, M. and Klenow, P. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112 (5): 947–985.Google Scholar
Brandt, L., Hsieh, C., and Zhu, X. (2008) Growth and structural transformation in China. In Brandt, L. and Rawski, T. G. (eds.), China's Great Economic Transformation, pp. 683–728. Cambridge, UK: Cambridge University Press.Google Scholar
Brandt, L. and Zhu, X. (2010) Accounting for China's Growth. Working paper, Department of Economics, University of Toronto.Google Scholar
Calvo, G. (1983) Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12 (3), 383–398.Google Scholar
Chang, C., Liu, Z., and Spiegel, M. (2015) Capital controls and optimal Chinese monetary policy. Journal of Monetary Economics 74, 1–15.Google Scholar
Chen, C. (2011) Foreign Direct Investment in China: Location Determinants, Investor Differences and Economic Impacts. Cheltenham, UK: Edward Elgar Publishing.Google Scholar
Cheng, G. (2014) A growth perspective on foreign reserve accumulation. Macroeconomic Dynamics 16 (6), 1358–1379.Google Scholar
China Security Regulatory Commission (2007) Notice of China Securities Regulatory Commission (CSRC) on the Issues Concerning the Implementation of the Pilot Rules on the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors. Available at http://www.csrc.gov.cn/pub/csrc_en/OpeningUp/RelatedPolices/QDII/201211/t20121109_216706.html. Accessed 3 November 2015.Google Scholar
China Security Regulatory Commission (2012) QFII Investment Quota to Be Increased by 50 Billion U.S. Dollars. Available at http://www.csrc.gov.cn/pub/csrc_en/OpeningUp/RelatedPolices/QFII/201212/t20121210_217805.html. Accessed 3 November 2015.Google Scholar
Coeurdacier, N. and Gourinchas, P-O. (2010) When Bonds Matter: Home Bias in Goods and Assets. NBER working paper 17560.Google Scholar
Coeurdacier, N., Kollmann, R., and Martin, P. (2010) International portfolios, capital accumulation, and portfolio dynamics. Journal of International Economics 80 (1), 100–112.Google Scholar
Coeurdacier, N. and Rey, H. (2012) Home bias in open economy financial macroeconomics. Journal of Economic Literature 51 (1), 63–115.Google Scholar
Depres, E., Kindleberger, C., and Salant, W. (1966) The dollar and world liquidity–A minority view. The Economist, February 5. Reprinted in Willet, T. D. and Officer, L. H. (eds.), The International Monetary System—Problems and Proposals. Englewood Cliffs, NJ: Prentice-Hall, 1969.Google Scholar
Devereux, M., Senay, O., and Sutherland, A. (2014) Nominal stability and financial globalization. Journal of Money, Credit and Banking 46 (5), 921–959.Google Scholar
Devereux, M. and Sutherland, A. (2008) Financial globalization and monetary policy. Journal of Monetary Economics 55, 1363–1375.Google Scholar
Devereux, M. and Sutherland, A. (2009) A portfolio model of capital flows to emerging markets. Journal of Development Economics 89 (2), 181–193.Google Scholar
Devereux, M. and Sutherland, A. (2011) Country portfolios in open economy macro models. Journal of the European Economic Association 9 (2), 337–369.Google Scholar
Engel, C. and Matsumoto, A. (2009) The international diversification puzzle when prices are sticky: It's really about exchange-rate hedging not equity portfolios. American Economic Journal: Macro-economics 1 (2), 155–188.Google Scholar
Feenstra, R., Obstfeld, M., and Russ, K. (2012) In Search of the Armington Elasticity. Manuscript, Department of Economics, University of California at Davis.Google Scholar
Fisher, J. (2006) The dynamic effects of neutral and investment-specific technology shocks. Journal of Political Economy 114, 413–452.Google Scholar
Freeman, D. (2013) China's Outward Investment Institutions, Constraints, and Challenges. Asia Papers, Vol. 7 (4). Brussels Institute of Contemporary China Studies.Google Scholar
French, K. and Poterba, J. (1991) Investor diversification and international equity markets. American Economic Review 81, 222–226.Google Scholar
Garcia-Cicco, J., Pancrazzi, R., and Uribe, M. (2010) Real business cycles in emerging countries? American Economic Review 100 (5), 2510–2531.Google Scholar
Gourinchas, P.-O. and Rey, H. (2007) From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege. In Clarida, R. (ed.), G7 Current Account Imbalance: Sustainability and Adjustment, pp. 11–55. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Gourinchas, P., Rey, H., and Gouvillot, N. (2010) Exorbitant Privilege and Exorbitant Duty. Mimeo, University of California at Berkeley.Google Scholar
Greenwood, J., Hercowitz, Z., and Krusell, P. (1997) Long-run implications of investment-specific technological change. American Economic Review 87 (3), 342–362.Google Scholar
Guerrieri, V. and Lorenzoni, G. (2011) Credit Crisis, Precautionary Savings, and the Liquidity Trap. NBER working paper 17583.Google Scholar
He, D. (2014) The nternationalisation of the renminbi. In Fan, S., Kanbur, R., Wei, S.-J., and Zhang, X. (eds.), Oxford Companion to the Economics of China, Chap. 15, pp. 109–113. Oxford, UK: Oxford University Press.Google Scholar
He, D., Cheung, L., Zhang, W., and Wu, T. (2012) How would capital account liberalisation affect China's capital flows and the renminbi real exchange rates? China and World Economy 20 (6), 29–54.Google Scholar
He, D., Luk, P., and Zhang, W. (in press) Internationalisation of the renminbi as an investing and a funding currency: Analytics and prospects. Pacific Economic Review.Google Scholar
He, D. and Pauwels, L. (2008) What prompts the People's Bank of China to change its monetary policy stance? Evidence from a discrete choice model. China and World Economy 16 (6), 1–21.Google Scholar
Heathcote, J. and Perri, F. (2002) Financial autarky and international business cycles. Journal of Monetary Economics 49 (3), 601–627.Google Scholar
Heathcote, J. and Perri, F. (2013) The international diversification is not as bad as you think. Journal of Political Economy 121 (5), 1108–1159.Google Scholar
Jeanne, O. (2012) Capital Account Policies and the Real Exchange Rate. NBER working paper 18404.CrossRefGoogle Scholar
Juillard, M., Karam, P., Laxton, D., and Pesenti, P. (2006) Welfare-Based Monetary Policy Rules in an Estimated DSGE Model of the US Economy. ECB working paper 613.Google Scholar
Justiniano, A., Primiceri, G., and Tambalotti, A. (2007) Investment shocks and business cycles. Journal of Monetary Economics 57 (2), 132–145.CrossRefGoogle Scholar
Kimball, M.S. and Shapiro, M.D. (2008) Labour Supply: Are the Income and Substitution Effects Both Large or Both Small? NBER working paper 14208.Google Scholar
Kindleberger, C. (1965) Balance of payments deficits and the international market to liquidity, Essays in International Finance. 46.Google Scholar
Lane, P. and Milesi-Ferretti, G. M. (2007) The external wealth of nations Mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics 73, 223–250.Google Scholar
Lardy, N. and Douglass, P. (2011) Capital Account Liberalization and the Role of the Renminbi. Working paper 11-6, Peterson Institution for International Economics.Google Scholar
Ma, G. and Zhou, H. (2009) China's Evolving External Wealth and Rising Credit Position. BIS working paper 286, Bank for International Settlements.Google Scholar
Morrison, W.M. and Labonte, M. (2013) China's Holdings of U.S. Securities: Implications for the U.S. Economy. CRS Report for Congress RL34314, Congressional Research Service.Google Scholar
Rabanal, P., Rubio-Ramirez, J.F., and Tuesta, V. (2011) Cointegrated TFP processes and international business cycles. Journal of Monetary Economics 58, 156–171.Google Scholar
Salidjanova, N. (2011) Going Out: An Overview of China's Outward Foreign Direct Investment. USCC staff research report, U.S.–China Economic and Security Review Commission.Google Scholar
Schmitt-Grohe, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61, 163–185.Google Scholar
Sester, B. and Pandey, A. (2009) China's $1.7 Trillion Bet—China's External Portfolio and Dollar Reserves. Working paper, Council on Foreign Relations Center for Geoeconomic Studies.Google Scholar
Shu, C., He, D., Wang, H., and Dong, J. (2015) The Influence of Chinese and US Financial Markets on Asia–Pacific. Contributed papers in BIS papers 82, Cross-border Financial Linkages: Challenges for Monetary Policy and Financial Stability, October.Google Scholar
Song, Z., Storesletten, K., and Zilibotti, F. (2011) Growing like China. Amerian Economic Review 101 (1), 196–233.Google Scholar
Sorensen, B., Wu, Y., Yosha, O., and Zhu, Y. (2007) Home bias and international risk sharing: Twin puzzles separated at birth. Journal of International Money and Finance 26 (4), 587–605.Google Scholar
State, Council (1996) Rules on Foreign Exchange Administration of the People's Republic of China. Promulgated in January 1996.Google Scholar
Tille, C. and van Wincoop, E. (2010) International capital flows. Journal of International Economics 80 (2), 157–175.CrossRefGoogle Scholar
van Wincoop, E. and Warnock, F. (2010) Is home bias in assets related to home bias in goods? Journal of International Money and Finance 29 (6), 1108–1123.Google Scholar
Zhu, X. (2012) Understanding China's growth: Past present and future. Journal of Economic Perspectives 26 (4), 103–124.Google Scholar