On China's Financial Stability Under The Circumstances Of International Capital Flows

With the global economic integration, the international capital flows advances in the breadth and depth constantly. However, international capital flows is just like a double-edged sword for the developing countries. It provides opportunities for developing countries to catch up with developed countries and narrow the income gap, but it also bring crisis at the same time. The beginning of China's reform and opening up is being open to international capital flows and encouraging foreign investment. There are numerous literatures concerning the benefits of international capital flows on China's economic growth, but less attention to its impact on China's financial stability. Therefore the influence of international capital flows on China's financial stability has not yet formed theoretical systems.The article attempts to set up the analysis framework of international capital flows influencing China's financial stability and use this framework to study practical problems. Through reviewing the historical origin, scale and motivation of international capital flows and combining the financial stability theory with the mechanism analysis of the international capital flows shocking the financial stability, the article carries out theoretical and empirical exploration on the way of international capital flows affecting China's financial stability. At last the paper provides meaningful systems and countermeasures for maintaining China's financial stability under the circumstances of capital flow by combining the capital flows regulation practice in other countries.The Introduction of the Article describes the research significance, present research situation, research theory blankness, research ideas, research methods and the innovations, and points out the theoretical value and research direction of the article.Chapterâ… briefly combs the concept of international capital flows. Meanwhile, in order to reflect on the past, the chapter reviews four historical climaxes of international capital flows and sums up the motives and historical role of international capital flows. The international capital flows helps to alleviate foreign exchange gap and savings gap of developing countries, while capital-exporting countries also benefit from the improvement of the return on investment. Theoretically, international capital flows can promote the convergence of return on capital, which has not happened in reality. And the article analyzes the actual constraints.Chapterâ…¡analyzes the scales of several types of capital flows in the world and China: direct investment, portfolio investment, current account and external debt, etc. On the whole, although the absolute value of the international capital absorbed by China is growing year after year, but the relative share in the world is still much lower. From the perspective of capital exports, China's overseas investment is mainly held in the form of low-yielding foreign exchange reserves, the scale and structure of company-level foreign capital exports does not match the scale and competitive industry structure of China's economy. The chapter also applies the tax cost method to analyze the cost of capital arbitrage and points out the capital flow pattern with much lower cost, so as to provide clues for drawing up targeted policies.Chapterâ…¢establishes the theoretical framework of the international capital flows influencing financial stability. The chapter first discusses the definition of financial stability and then elaborates the practical and theoretical mechanism of international capital flows influencing the financial stability. The chapter takes Thailand during Southeast Asia Financial Crisis as an example to illustrate how the international capital flows influencing financial stability and leading to the crisis and combines with three generations of currency crisis models to point out the mechanism of capital flow causing the currency crisis and financial crisis from the theoretical point of view.Sectionâ…£of this chapter applies classical macroeconomic IS-LM-BP model to analyze the impact of international capital flows tendency reversion on the output, interest rates, exchange rates and other key economical and financial indexes, introduces the variable of overseas investment income to extend IS-LM-BP model by combining the reality that China owns a lot of overseas assets, and finds out that the influence of the overseas interest rate change on the output and exchange rate is smaller after the introduction of overseas investment income.Chapter IV is the empirical part which quantifies the influence of international capital flows on the financial stability. Financial stability is an abstract concept, which should be eventually embodied in some core indicators influenced by international capital flows. This chapter selects some core indicators of the financial stability, such as prices, banking system stability, exchange rate, real estate and stock market prices, then quantifies the shock of international capital flows on these variables and carries out quantitative analysis as far as possible, so as to clarify the impact. Though currently the main problem is caused by international capital inflows, with the implementation of "going out" strategy, capital outflow will also affect financial stability. This chapter also discusses the possible influence of capital outflow.Chapter V establishes the hierarchical early warning indicator system with Chinese characteristics by combining the quantitative analysis result of Chapterâ…£.The system also fully utilizes the research outputs of international capital flows crisis early warning indicator system such as K-L-R and F-R theory and domestic research outputs. The system can anticipate potential crisis triggered by capital flows, thus are helpful to prevent the crisis. The system is divided into three levels: economic fundamentals signal, direct effect signal and pressure signal. The regulatory agencies can determine corresponding policies according to the level and quantity of signals.Chapterâ…¥studies the theory and practice of international capital flows regulation. What kind of measures should be taken after the early warning indicator system sends out the signal? What can we draw from international experience? The chapter first analyzes the change of the academic's attitude on the international capital flows regulation and the regulation measures win the recognition of more and more economists. The chapter studies the role of price-based international capital flows regulation measures by combining Brazil's capital flows tax and Chile's Unremunerated Reserve Requirement, also studies the content and effect of quantity-oriented international capital flows regulation measures based on Malaysia's experience during the Southeast Asia financial crisis, compares the value of the two types of regulation measures, and concludes that the price-based regulation measure is better than quantity-oriented regulation measure under the environment of market economy.Chapter VII puts forward corresponding countermeasures and suggestions on how to maintain China's financial stability under the condition of international capital flows. It not only includes macroscopic system construction: implement more flexible exchange rate arrangements and the state only keeps the optimal foreign exchange reserves, lets private agency hold more foreign exchange and promotes capital account liberalization based on the reform of the international monetary system. Specific micro-regulation measures are also required: on the basis of drawing lessons from the international experience in Chapter VI, when early warning indicators system sends out signal, the article put some capital flows regulation measures. Thus the article completes the leap from theory to practice.Chapter VIII summarizes the main conclusions of the paper.