| In a context of increasing international trade and investment, manycountries, especially the western countries, have gradually been relaxingtheir strict control of foreign exchange rate and capital flow since late1940s when Breton Woods System was set-up. Now the more flexibleforeign exchange rate and capital flow as foreign exchange administrationsystem is characteristic of some developing countries. Owing to manyhistorical factors, the development of the international trade andinvestment of China is different from that of the western countries, and sois the development of foreign exchange administration system.Compulsory foreign exchange sale and purchase under the currentaccount of BOP, direct governmental management over foreign exchangeunder the capital account of BOP, and RMB's pegging to dollar as anexchange rate system, characterize the main features of China's currentsystem. According to the Krugman "Trilemma" theory, monetary policycan be independent. Evidences supporting the effectiveness of strictcapital control regulation are mainly from South Asian Financial Crisis in1997, almost 8 years ago. However, so many things have changed sincethen with the fast increase in international trade and investment. On theother hand, arguments advocating the cancellation lack econometricprocess and data. This paper tries to examine the effectiveness of theforeign control regulation, and to compare the costs and benefits of it.Ⅰ. The purpose of this paper:1. Examine the effectiveness of the foreign control regulation;2. Examine the possibility of conflict between monetary policy and thepegging foreign exchange rate together with the strict capital control;3. Analyze other possible costs that the pegging foreign exchange ratetogether with the strict capital control may bring about.Ⅱ. The framework of this paper:1. As for the capital flight able to be estimated by econometric processfrom BOP, this paper draws on Co-Integration Relation analysis andGranger Test, to analyze the relationship between China's capital flightand exports, exports and foreign directive investments (FDI). Theconclusions are: there is a significant positive relationship betweenChina's capital flight and exports, the increase of the latter one willcertainly result in the increase of the former one; exports, at the sametime, has a positive relation with FDI, the increase of which will surelyresult in the fast increase of them. A simple game theory model isdeveloped to prove the fact it is difficult to strengthen the regulationagainst illegal capital flow.2. As for the capital flight unable to be estimated by econometric processfrom BOP, institutional economic method is of vital importance, whichidentifies the factors underlying the existence of the underground illegalfinancial organizations. Some cases are presented to illustrate thetremendous capital flight done by the organizations. A simpleforeign-supply-and-demand model is developed to prove the fact theregulations on foreign exchange will bring about high profits for illegalforeign exchange transactions, which prompt the underground financialorganizations to exist and boom. Another simple game theory model isdeveloped to prove the fact that it is difficult to eliminate the undergroundillegal financial organizations.3. This paper then analyzes the possible causes of the illegal capital flows.This paper argues that China's capital regulation is to some extendineffective on the micro-economic level.4. According to a simple IS-LM-BP model developed in this paper, thispaper argues that China's capital regulation is to some extend ineffectiveon the macro-economic level.5. This paper argues, through analyzing interplay between domesticmonetary policy, and fixed foreign exchange together with capital controlregulation, that the latter two in fact have negative effect on the formerone. The Krugman "Trilemma" theory is flawed.6. This paper finally goes to analyze other possible costs the capitalcontrol regulation may bring about.Ⅲ. The main conclusion of this paper:1... |
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