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The Empirical Analysis on the Influencing Factors of Foreign Short-term Capital Inflows

Author: HuZuoYue
Tutor: ShiYongDong
School: Dongbei University of Finance
Course: Finance
Keywords: Foreign short-term capital inflows Influencing factors Financial stability
CLC: F832.6
Type: Master's thesis
Year: 2011
Downloads: 54
Quote: 0
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Abstract

With the accelerated development of international economic integration, the liberalization of international capital flows is significantly strengthened. Capital flows are promoting the economic development, at the same time also affecting the country’s economic structure. History shows that global financial crises which broke out several times had a direct relationship with huge short-term capital inflows before the crises. Once the sign of the financial crisis appears, foreign capital will inevitably leave the market, following the sharp domestic currency devaluation, and ultimately the financial crisis breaks out.China’s booming economy in recent years has attracted great interest of overseas investors, and a large number of foreign short-term capital inflows into China. The expansion of foreign exchange reserves results in excess liquidity of domestic financial market, inflation, overheated macro-economy and other issues, and further aggravates the pressure on RMB appreciation. In view of our country’s current economic situation, China’s financial crisis is unlikely. However, short-term capital generally has instability, excessive inflows will lead to the imbalances of Chinese economy, and ultimately has the impact on China’s financial stability. Therefore, in-depth analysis on the influencing factors of foreign short-term capital inflows has important practical significance for preventing and resolving the risk of foreign short-term capital inflowing to China.This paper is devoted to the empirical analysis on the influencing factors of foreign short-term capital inflows. It summarizes and reviews relevant theory and research status at home and abroad, elaborates the reasons, current situation and problems of foreign short-term capital inflowing to China. Based on the theoretical analysis, the paper selects quarterly data from 2001 to 2010, and uses the method of metrical analysis to carry on the empirical analysis on five influencing factors of foreign short-term capital inflows, including interest rate, exchange rate, inflation rate, capital market return rate and economic growth factor. At first, it establishes the regression model, and then uses the unit root test to determine the variables for stable variables, and further does co-integration test to make sure the long-term stable relationship existing between the variables. And then, based on the above test results, it carries out Grainger test to judge the causal relationship between the variables. The final result shows that economic growth is the main influencing factor of foreign short-term capital inflows. The supervision mechanism of China’s short-term capital inflows is not perfect, so strengthening and improving of monitoring and management of foreign short-term capital inflows for China’s financial stability is very important. Finally, according to the results of empirical research, it puts forward policy recommendations for the regulation of foreign short-term capital inflows. China should take effective macroeconomic policies to maintain good economic development momentum; strengthen financial supervision and establish the risk warning mechanism; improve the domestic financial system and strengthen the capacity of using foreign investment; take the necessary capital controls, standardize and stabilize the financial market; encourage the innovation of science and finance, and establish the sense of potential crisis.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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