The Impact of China’s Capital Account Liberalization on the Direction of Cross-border Capital Flows

Abstract

Objective: This article aims to investigate the impact of China’s capital account openness (OPEN) on cross-border capital flows (CCF). Methods: The research utilizes the ARDL-ECM model for empirical analysis. It begins by summarizing existing literature on the topic and then proceeds to analyze the data spanning from 1998 to 2023. The study explores the long-term cointegration relationship between OPEN and CCF. Additionally, it investigates the correlation between the direction of openness and its effect on CCF. Notably, the research introduces the concept of the volatility of OPEN as an explanatory variable to understand its impact on various types of capital flows. Results: The findings reveal a significant long-term cointegration relationship between OPEN and CCF. This relationship is significantly influenced by the direction of openness. Moreover, the study identifies that the volatility of OPEN notably affects different categories of capital flows. Furthermore, it observes that structural changes in net foreign securities investment are comparatively higher than those in net foreign direct investment. Conclusion: This study underscores several recommendations for the ongoing process of capital account liberalization in China. Firstly, adjust OPEN flexibly to promote or restrict specific types of capital flows. Adopt elastic capital control measures for different types of capital flows to balance the stability of domestic capital markets and the activity of international capital flows. Secondly, careful adjust capital outflow openness to maintain economic environmental stability and prevent capital flight. Lastly, encourage long-term investment, particularly in the real economy and infrastructure sectors, and provide incentives for investors committed to long-term investment.