The Sudden Stop In Capital Inflows And It's Impact On Chinese Economy

With the rise of developing countries, international capital began to inflow into emerging market economies. On the one hand, capital helps a country to stimulate economic growth, on the other hand, due to various reasons it also brings instability to the country, or even worse, lead the economic go to collapse. Since the 1990s, there are a series of crises caused by the sudden stop of capital inflows, such as the Mexican crisis of 1994, the Asian crisis of 1997 which began in Thailand and the Brazilian crisis in 1999.The balance between capital flows and macroeconomic stability is very important, that the whole China's capital account opening process must be deal with it very well. However, China has attached great importance on capital flows, but now still focus on the hot money inflows rather than the sudden stop of capital inflows. As the domestic have not yet conducted a systematic study about sudden stops, the purpose of this paper is to introduce this phenomenon, and through the foreign literature I'll summarize what the sudden stops condition is and how the sudden stops impact on the economy. Furthermore, combined with China's actual structural VAR model to analyze the data, considering if the sudden stop of capital inflow occurred in China, what the consequences would be. I hope this paper attract more scholars to research the sudden stops of capital inflow.For China, the policy of capital controls remain, which makes the monetary authorities have not officially facing the "The Impossible Trinity". But in the long run, giving up capital controls and turning to the free capital movement is the most possibility trend. Because in this situation what the government can do, or is the choice of exchange rate stability and to give up monetary independence, or to abandon the currency exchange rate stability and uphold the independence. For China, there is no possibility to rely on any other country, and therefore a floating exchange rate has become the inevitable choice. However, due to the many factors including that the current structure of China's export products which is very single and the investment from private sector is not active, achieving the goal that free-floating exchange rate still need to take a long time. However, in recent years there is pressure on the RMB appreciate, floating exchange rate should be fluctuated within a large range, and RMB should actively participate in regional monetary cooperation to alleviate the adverse effects of external shocks.