Benefits and costs: The impact of capital control on growth-at-risk in China

Abstract

Capital account liberalization is generally beneficial to developing and emerging countries. However, if there is a downside risk in one country, capital control policy can prevent it from exposing to carry trade flows and capital flight, and protect it from external financial volatility. In this paper, I study the marginal effects of different types of China’s capital control indices on GDP growth distribution and the term structure of such distribution using quantile regressions with local projections and fitted skewed t-distribution. I find that (i) there are heterogeneous effects of China’s capital control policies on GDP growth distribution: the aggregated capital control indices are beneficial in reducing the downside risk of real GDP growth in the medium term whereas they are costly on the upswings of real GDP growth in the near-term; (ii) the marginal effects of capital control indices on GDP growth over quantiles show that the heterogeneous effects are stronger in the near-term than medium term; (iii) specifically, these heterogeneous effects are more evident in the short term for outflow control index and resident transaction control index; (iv) the granular capital control indices show broadly heterogeneous effects even if several of them are statistically insignificant.