A Measurement Of The Degree Of China’s Capital Control Based On The Perspective Of Arbitrage

After the global financial crisis in2008, the international capital which had beenflowing into emerging economies quickly fled to Europe and other developed countries,causing a series of problems such as lack of liquidity caused by the negative impact of theeconomic recession and a shortage of funds to developing countries. China effectivelyresisted the international short-term capital flows on domestic financial markets and thereal economy impact by the imposition of capital control, safeguarding the sustainable andstable development of the domestic economy. Therefore, it is crucial to he next phase ofChina’s capital account liberalization reform to measure the actual degree of opening ofChina’s capital accurately.This paper is divided into five parts. The first part described the research backgroundand research ideas as well as the innovations and shortcomings of this article. The secondpart focused on carrying out a literature review on two types of capital controlsmeasurement methods-policy based approach (de jure) and actual result based approach(de facto)–respectively, and gave the reasons why the latter one was chosen as the mainmethod in this paper. The third part analyzed the two types of arbitrage mechanismbetween foreign and domestic RMB forward market which actually exist, and elaboratedon the reason why the use of arbitrage costs can be a direct measurement of the degree ofcapital control, and expatiated on the relationship between arbitrage behavior and hotmoney flows. The fourth part introduced the AB-SETAR model and discussed itsapplicability of this study, then used the AB-SETAR model estimated the upper and lowerarbitrage boundaries of each sample interval. The final part gave a conclusion and severalpossible further research.The basic conclusions of this study noted that since November27,2006to April6,2013, the actual extent of China’s capital control gradually weakened. Capital controlfocused on capital outflows in the first phase, capital inflows in the second phase, thencapital outflows again became the focus of capital control in the third phase and in thefourth stage, capital control focused on both direction. In addition, the conclusions of thisstudy preliminarily corroborated the effectiveness of China’s capital control, and further studies can be carried on to analyze the effectiveness of capital control in China by takingthe change of policies into account.