The Impact Of U.S. Monetary Policy Shift On China's Short-term International Capital Flows

With the recovery of the U.S.economy and the improvement of financial stability,the U.S.monetary policy has changed its direction.Recently,the U.S.monetary policy shift triggered a large-scale withdrawal of international capital,making Argentina,Turkey,Ukraine and other emerging market countries hard hit.China is bound to face the risk of increasing uncertainty in short-term capital flows with its capital control gradually liberalizing.Therefore,studying the impact of U.S.monetary policy shift on China's short-term capital flows will help further understand the mechanism of external shocks on capital flows and provide a theoretical and realistic basis for financial risk prevention.Starting from the current situation,this paper explores the mechanism of the U.S.monetary policy shift to China's short-term capital flows,and makes an empirical study of its relationship.Firstly,this paper divides the last decade into two stages: quantitative easing and the period after monetary policy shift,and separately analyses the background,specific content of the U.S.monetary policy and short-term capital flows of China in the two stages.It is found that there is a certain correlation between American monetary policy and short-term capital flows of our country.Then,based on theories such as the Mundell-Fleming model,the generalized currency exchange rate determination model and so on,this paper proposes that the U.S.monetary policy will take interest spreads and exchange rates as transmission channels,and then affect China's short-term capital flows.In addition,this paper selects the data from October 2002 to September 2018 to construct the TVP-SV-VAR model for empirical research which confirms the validity of the interest rate mechanism and exchange rate mechanism.Hence,this paper draws the following conclusions: Firstly,the shift of U.S.monetary policy will impact the short-term capital flows in China through interest rate spreads and exchange rate expectations,but the direction and intensity of the impact will vary according to the economic situation of the two countries and other factors.Secondly,under the influence of "liquidity trap",the influence of U.S.monetary policy on interest rate spreads between the two countries is asymmetric.Meanwhile,the economic situation and the difference of money supply will also make the impact of U.S.monetary policy on exchange rate expectations uncertain.Thirdly,the impact of exchange rate expectations and interest rate spreads on short-term capital flows is rather stable,but the impact will be weakened with the increase of exchange rate marketization and interest rate marketization.Fourthly,factors that drive the flow of short-term capital in the international arena,in addition to arbitrage,also include the need for capital to hedge.