International capital flow in a period of high inflation: The case of China

Abstract

This study investigates the behavior of international capital flows by considering northbound capital flows into China’s A-share market—a market where northbound capital is widely viewed as synonymous with “smart money”. However, since the outbreak of COVID-19, the global economy has undergone a period of high inflation and stocks are considered overweight by international investors. We therefore explore whether the predictive power of northbound capital changes during high-inflation periods. Using a threshold regression model, we find that northbound capital only has predictive power when the global inflation level is low. We also explore the relationship between northbound capital and global risk and demonstrate that the weakened predictive power of northbound capital in our sample is independent of high global risk. Thus, overall, this study finds that the role of northbound capital in China’s A-share market is closely related to inflation and to the global economic environment.