Short-term Capital Flow Determinants

Ten years ago, the breakout of the Asian financial crisis made the research on the sudden reversal of the short-term international capital flows an important topic. Although our country has capital controls, much capital bypasses the barriers to flow into China, and makes the economy instable.This paper uses the private signals and public signals model to explain the determinants of China's short-term capital flows firstly. The main reasons of capital flows are returns-chasing and information asymmetric. Foreign investors recoil from China because of a negative private signal about global marker or negative public signal about China. On the contrary, short-term capital flows into China because of their positive private signal about global marker or positive public signal about China.Then I do three empirical tests. The results show that NDF is the most important explaining variable, and Libor is also a good explaining variable. This means that the main reason of short-term capital flows is the expectation of RMB appreciation, and the spread between China and other countries is another reason. We also find the rate of our country is a poor explaining variable. So facing the problem of short-term capital flows, China should focus on the appreciation of RMB, not just control the rate.