China International Short-term Capital Flows, Empirical Studies

Since 2003, short-term capital flows (SCF) has exceeded foreign direct investment, becoming one of the major means of capital flows with characteristics as tremendous, volatile and difficult to track. SCF may cause the rapid expansion of international reserves, unstabilize the Renminbi, and encourage domestic real estate and stock market bubble tendency, exacerbate the domestic financial system risks. In short, with China's gradual opening up of its capital account, it is necessary to conduct deep research on this issue in order to take advantage of SCF while avoiding relevant risks.This paper analyzes the SCF in China in recent years, which is divided into three parts: the situation, reasons and effects. First, we examine and calculate the volume of SCF in recent years both in yearly scale and monthly scale. Second, base on investors' motivation theory, we establish a theoretic foundation in Micro level to find the main reasons behind SCF in China, which are arbitrage, speculation and asset allocation incentives. An empirical study is conducted later to verify the previous findings. Third, we launch an empirical study to analyze the effects of SCF on China's bank system, real estate market and security market. Regarding the shock that SCF may cause, the gradual opening up of capital account whisle strengthening supervision and precaution can better meet the challenges.The paper proceeds as follows: The background, theme and framework of the study are introduced in the 1st chapter. The 2nd chapter is the literature review of SCF. In chapter 3rd, we roughly estimate the volume of SCF in yearly scale as well as in monthly scale in present China. Then, three kinds of investment motivations are examined and quantified by a VAR model in chapter 4th. The chapter 5th analyses the impact of SCF in China. Conclusions and implications are given in the last section.