The Motivations And The Impacts Of International Capital Flow In China.

Since reforming and opening in China over 30 years, the steady and rapid economic growth attracts people’s attentions all over the world. Due to appropriate investment and economic environment, more and more international capital would like to enter Chinese markets and make benefits. According to the report from Chinese State Administration of Foreign Exchange, the average growth rate of foreign capital used by Chinese investment is more 10%. There is a debate that whether China needs such a large scale of foreign capital and there is still no consistent answers. In addition, because of the stronger expectation of appreciation of RMB, more and more short-term international capital comes to China. They want to avoid the impacts of Financial Crisis and earn the benefits of interest rate and appreciation of RMB simultaneously. The international capital comes from many different countries and has the characteristics of large scale, high liquidity, speculation. Therefore, large international capital inflow will increase the liquidity of the markets and decrease the cost of lending, thereby result in the price foam of capital market, the overheating of economy and problem of inflation. The large outflow of international capital will affect the international reserve of government and exchange rate regime, all of these could cause the financial crisis. Although Chinese government has some strong restrictions on the international capital flows that international capital can not flow freely, some evidences show that more and more international capital get out of the governance of Chinese government and enter in to Chinese markets quickly. The effects of hidden international capital would be the big barrier of economic growth. Thus, research on the international capital and causes of flows is very important. This paper tries to analyze the current situation and channels of international capital flow and study the influences of short-run and long-run international capital by using the econometric methods. The expectation of exchange rate of RMB, the differences of interest rate and the price level are the most important influence mechanism of Chinese Macroeconomics. Through the econometric model to estimate whether the international capital flows are the reason of the price fluctuation in the capital market. The analysis of this paper would provide the empirical advices for Chinese fiscal and monetary policy.According to the theoretical analysis of international capital flow, we are going to use the portfolio investment theory to analyze the reasons and impacts of international capital flows in China. The portfolio investment theory focuses on the reasons why the international capital flows have double directions. They find that the interest rate is not only reasons that induce the capital flows. Thus, the international investors try to maximize the final total benefits with the expectation earning and risky loss. Based on this theory, we establish the linear econometric models to find the impacts and incentives of the international capital flows. In addition, the the research on the international capital flows should base on the Chinese situation. The total international capital flows are divided into two categories:short-term international capital flows and long-term international capital flows. The long-term international capital flows mean the term of use is in the long-run and most of the capital wants to earn long-run benefits from investment. The short-term international capital flows refer to short term of use and most of the short-term capital would like to make speculation investment. The definition of short-term international capital flows is not as same as the hot money. Hot money means that the capital flows frequently amony the countries and term of use is shorter than one year. However, we do not give a strict requirement on the term of use for short-term international capital flows. Therefore, due to the capital flows regulation of China, the international capital which has the characteristics of flowing frequently and speculation is short-term international capital.By analyzing the previous paper, we represent that the net total international capital is equal to sum of net balance of financial account, net errors and omission account and benefits account. The total amount foreign reserve minus the net FDI, product net export and services net exports is equal to the net short-term international capital. With the data of the recent decades, the trend of short-run international capital is similar as the trend of total international capital. Therefore, the fluctuation of international capital is caused by short-run international capital. The contribution of long-run international capital is too small. The amount of short-run international capital in the year of 2009 is 2000 billion dollars and 1024.66 billion dollars than it in 2004. Except the year of 1996,2006 and 2007, the short-run international capital plays a crucial role in the fluctuation of capital flows. In the year of 1996, the reform of the Chinese exchange rate regim and the interest rate declining. In the year of 2006, Chinese government encourages domestic companies to make international investment. This result in the larger capital outflow and the net capital inflow become lower. In the year of 2007, the financial crisis causes more long-run international capital comes to China to avoid the loss of investment benefits. Hence, the short-run international capital is the departure point of Chinese international capital flow governance. According to the analyisis of econometric model, the factors that affect the capital flows are difference of interest rate, exchange rate, growth rate of third industry, investment return of capital market and the policy of exchange rate. Especially, the influences of interest rate, exchange rate and return of capital market are significant. Because only the stock market can satisfy the characteristic of large volume and high liquidity of international capital, international capital would like to go to stock market to avoid the monitor of government. Because of the estimation of VAR model, the appreciation of RMB exchange rate and higher capital price cause the short-run international capital inflow. These indicate that most of Chinese international capitals are the speculative short-run international capital. Furthermore, development of Chinese economy and raised expectation of RMB exchange rate accelerate the international capital inflow that liquidity in Chinese market becomes larger and larger. In order to offset such a large liquidity, the central bank of China has to use moentary policy decrease the impacts of capital flows. The international capital will affect the overall economic system by real interest rate mechanism, capital price mechanism and credit mechanism. According our analysis, the impacts of international capital flows on Chinese capital market not only exists directly but alos indirectly. Beside the direct impacts, the international capital flow will force the increasing the monetary base that the capital price moves simultaneously.The governance of international capital is similar as preventing flood project. We should study not only the incentives, but also channel of international capital. We try to guild the capital to the area where we want to and forbid flowing to every inputs market freely. We should pay attention on the investment purpose of international capital, prevent the misunderstanding of the price and the inefficiency of resources distribution. However, it is different from the preventing flood. The flows of international capital are two directions. The influences of change of direction should be thought. To control the impacts of international capital, we have to complete the governance system, exchanger rate regime and rules of foreign investment, establish the warning system and solution plans.