The Impact Of Short-term Cross-border Capital Flows On China's Financial Stability Under The Process Of Financial Liberalization

With the accelerating process of China's capital account liberalization,the further opening-up of China's financial industry,the deepened reform of the exchange rate marketization,the advancement of the internationalization of the RMB and the proposal for "The Belt and Road" strategy under the New Economic Normal,the following years will become an important time window for China's financial liberalization.Financial liberalization will not only bring benefits to the development of China's economic and financial innovation but also will bring out great risks,especially with the deepening of financial liberalization,the frequency and volatility of short-term cross-border capital flows will increase significantly.However,short-term cross-border capital flows are highly mobile,speculative and destructive,which may exert a certain impact on the financial stability,and even lead to systemic financial risks.International experience shows that the risk of short-term cross-border capital flows brought by financial liberalization has become one of the major financial frictions in the emerging market economies.Therefore,it is of great theoretical and practical significance to study the impact of short-term cross-border capital flows on the financial stability of China in the context of the continuous progress of financial liberalization.This paper starts from theory review and domestic and foreign scholars' research experience.Firstly,it combs the relationship among financial liberalization,short-term cross-border capital flows and financial stability.Secondly,it explores the deepening path of financial liberalization and the status of short-term cross-border capital flows in China.Then,it uses econometric methods and models such as MS-VAR model,TVP-SV-VAR model and principal component analysis to systematically discuss the impact of short-term cross-border capital flows on financial stability in China.Based on the validity and feasibility of the analysis,the paper mainly focuses on the following three perspectives:financial institution stability,financial market stability and financial asset price stability.Combining with theoretical research,empirical test and case analysis,this paper studies the path and mechanism of the impact of short-term cross-border capital flows on financial stability in China.Finally,it puts forward the policy of improving macro-prudential financial regulation and constructing a macro-prudential management framework of cross-border capital flows.This paper's main conclusions and innovation points are as follows:(1)This paper studies the influences of financial liberalization and short-term cross-border capital flows on the financial stability of emerging market economies through systematically combing the following four typical financial crisis cases:Latin American debt crisis in the 1980s,Taiwan's asset bubble during 1987-1990,Mexican financial crisis in 1994 and Asian financial crisis in 1997.The study results indicate that most emerging market economies experiencing financial crisis are faced with financial problems such as blind opening of capital account,rigid exchange rate system,high leverage,irrational debt maturity structure and defective financial market.History is a guide to better prospective,the experiences of emerging market economies also provide important lessons for China's financial liberalization and cross-border capital flow management.(2)This paper establishes a bank stability index based on China's economic and financial development,and then analyzes the impact of short-term cross-border capital flows on China's bank stability under external shocks using the MS-VAR model.The empirical results indicate that:Global risk factors,the U.S.Quantitative Monetary Policy and Price-based Monetary Policy have certain impacts on the short-term cross-border capital flows and bank stability in China.However,the direct impact of the external shock on bank stability is weak,which is mainly affected through the channel of short-term cross-border capital flows.When suffered from the subprime mortgage crisis,the European debt crisis,the US monetary policy adjustment,the Fed rate hike and other external shocks,the volatility of short-term cross-border capital flows and bank stability index will increase significantly,and then forming an asymmetric effect.(3)This paper studies the impact of short-term cross-border capital flows on the stock market stability from the aspects of transmission mechanism and empirical analysis using MS-VAR model.The empirical analysis results indicate that:Because China's capital and financial account is still under stringent regulation,the direct impulse effect of short-term cross-border capital flows on stock market stability is limited;The money supply channel strongly influences the capital market stability while bank credit channel and exchange rate channel exerts relatively weak influences.(4)This paper constructs a TVP-SV-VAR model to study the dynamic links of RMB exchange rate fluctuations,short-term cross-border capital flows and stock price volatility.The empirical analysis results indicate that there is a strong linkage effect among the three variables,which changes with the China's financial environment.This paper also analyzes the asymmetric effect on the stock market exerted by the exchange rate volatility and short-term cross-border capital flows under the external shocks using Markov regime switching model.(5)This paper constructs a macro-prudential management framework of cross-border capital flows based on the international experience and China's national status.The regulatory framework is mainly composed of the following four aspects:Firstly,to coordinate and cooperate with macro-prudential management and micro-prudential supervision as well as macroeconomic policies;Secondly,to build a monitoring and early warning system for the short-term cross-border capital flows;Thirdly,to explore diversified macro-prudential supervision instruments;Fourthly,to promote the financial liberalization strategy and the structural reform of financial market steadily.Macro-prudential management aims to regulate the cross-border capital flows systematically in a counter-cyclical,inter-temporal and cross-market manner,so as to provide useful references for the management of cross-border capital flows in the process of China's financial liberalization.