Empirical Analysis Of The Impact Of Speculative Short-term International Capital Flow On China's Economy

Though international capital flow theories have already developed quite deeply, there are not so many quantitative tests and analysis about the impact of speculative international capital flow (hot money) on one country's economy. And there are a lot of arguments and issues unsettled about the scale of the impact. Moreover, as an important economic behavior in the financial market, hot money can not only shock the effectiveness of policy implementation but affect the stability and safety of a country's economy. With the openness of the financial market, the market can play a more important role. But the release of the free space does not mean the lack of the monitor and management. When the large amount of hot money flow into our country, the exchange rate policy must be influenced, and then affect the stability of the RMB; the assets price must be influenced, and then effect the stability of the stock market and the real estate market; the monetary policy must be influenced, the policy direction are missed due to the impact of hot money.In order to provide more valuable suggestions for affecting economic stabilization under such environment, we measure and verify the impact of the inflow of hot money on China's economy by choosing them as the research object. From a point of view of the relationship between the hot money and RMB nominal exchange rate against the U.S. dollar, the Shanghai Composite Index and the housing sales price index, we use the research methods which are combining quantitative nalysis and qualitative analysis, mathematics model description and quantitative test, the criterion analysis and demonstration analysis all together to achieve the goal.The full text consists of four chapters. In the first chapter, we summarized the theory and current situation of the international capital flows, especially the short-term ones. Then we briefly introduced the background, the current situation, the literature review and the structure of this paper. A number of classical theories are also briefly described for the following research, so are the research method and the structural arrangement.The second chapter focuses on the relationships among hot money inflow, exchange rate and stock price (Here, we use the Shanghai Composite Index.). First of all, we measured the size of hot money inflow and got the monthly data since the exchange rate regime reform in July 2005 and described the statistical characteristics of the three time series----hot money inflow, exchange rate and stock price. Then we systematically expounded the theory of CLR Model and Multiple Arbitrage Model in order to compare the conclusions from those two models with our empirical results and to highlight ours. After a unit root test, we set up the vector autoregressive model by using stationary time series, and used Granger Causality Test to solve the problem that whether x would cause y. Through the test above, we came to the results of the relationships of those three variables: The appreciation of the RMB could lead to the inflow of hot money and the rise of stock price; the inflow of hot money could lead to the rise of stock price. Therefore, the impact of the appreciation of the RMB on the rise of stock price could be interpreted as direct and indirect ones separately. As for the relationship between stock price and exchange rate, we used the generalized autoregressive conditional heteroscedastic model (GARCH model) for the further examination, and have got the result that: The exchange rate fluctuations of previous month have negative impact on stock price; thinking of the appreciation of the RMB against U.S. dollar of the last month, investors will increase the holdings of assets denominated in RMB because they think that the RMB will have a further appreciation. It could be seen that compared with the results of Granger causality test our conclusions have a further meaning. After comparing our empirical results and the theoretical model (CLR and Multiple Arbitrage Model), we found that they matched partly, but not exactly and totally. Meanwhile, we give the policy recommendation: a careful development of an efficient and well-regulated financial system, deeper financial and capital markets can mitigate partly one of the main risks associated with large capital inflows in developing countries—the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate. By avoiding a substantial appreciation of its currency, the respective economy can take advantage of the inflows'growth enhancing potential without having to make painful policy choices. Finally, the impact of capital inflows on the real exchange rate can be significantly reduced by the use of a more flexible exchange rate regime. Also, the stability of the stock market need to be strengthened.Third chapter focuses on the relationship among the hot money inflows, exchange rate and house price (housing sales price index). Just like the former chapter, we conduct a statistical description on the variable series and make the stability test. And then establish a vector autoregressive model (the set of the model is stable after the AR root test). Based the VAR model, we make the Granger Causality Tests to the three variables. Finally, we obtain the following conclusions: (1) appreciation of RMB Granger cause the hot money inflow; (2) hot money inflow Granger cause the house price rising, and in turn, house price rising Granger cause inflow of hot money. A major feature of this paper is worth noting: We take into account that house price include the persistent component and transient component. So we decompose the house price index into Trend and Cycle components using the Hodrick-Prescott filter. And then we research the relationship between hot money and the two components (Trend and Cycle). Through empirical test, we have found: it is precisely the Trend component of house price rising cause the inflow of hot money; the inflow of hot money lead to the Cycle component of house price. This conclusion explains the former conclusion (2) which can be explained more deeply. In summary, this paper argues that: it is the trend of house price rising that attract the inflow of hot money, but the hot money can not cause a further rise. Inflow of hot money can only cause the fluctuations of house price. Therefore, it can help maintain the stability of real estate sales price if we control the inflow of foreign capital by taking effective measures.In short, the reason why we measure and analysis the impact of short-term international capital flows on China is mainly to provide regulators with correct management methods and ideas to solve the negative impact of hot money inflow on our country's economic at the present period and to carry out reform to the controllable factors. The issue of international capital flow is very complex and the regulatory measures and regimes in China are not perfect enough. More difficulties we need to face due to all these when performing theoretical research and empirical tests. Therefore, in order to achieve more stable and precise results when performing theory analyzing and experience judgment, we still need to verify our findings in practice.