A Research On The Influence Of US Monetary Policy Changes On China’s Short-term Capital Flows

Along with the constant improvement of economic indicators such as the US unemployment rate and inflation rate,the Federal Reserve restarted to increase the interest rate in December 2015,taking a crucial step in the normalization of US monetary policy.As the main international currency for settlement,the monetary policy shift of its issuers will have spillover effects on economic and financial countries in various aspects.Among them,short-term capital with speculative nature must bear the brunt.During the period of quantitative easing,the Federal Reserve released a large amount of liquidity in the US dollar.With the combination of liquidity and China’s financial openness,China’s short-term capital inflows have increased substantially.After the announcement of interest rate increases,the Federal Reserve tightened the liquidity of the US dollar.This monetary policy shift will definitely impact China’s short-term capital flows,which in turn affects financial stability.In this context,studying the impact of the Federal Reserve’s interest rate increase on China’s short-term capital flows has profound practical significance for maintaining China’s financial market stability.This paper uses literature combing method,theory and qualitative combination method and quantitative verification method to study the topic.The specific research contents are as follows:Firstly,this paper uses literature analysis to sort out the literature on the impact of Federal Rcservc rate increases,short-term capital flows,and the impact of US monetary policy changes on short-term capital flows,and theoretically defines monetary policy and short-term capital flows,and summarizes outflow channels for monetary policy on short-term capital flows.Then,based on the theoretical analysis,qualitative analysis is used to study the background and causes of the Federal Reserve’s interest rate increase,the characteristics and current situation of China’s short-term capital flows,the transmission channel and impact of the Federal Reserve’s interest rate increase on China’s short-term capital flows,finding that the Federal Reserve’s interest rate rise has led to the expansion of China’s short-term capital outflow through multiple channels.After the conclusion,in order to further verify the accuracy of the conclusion,using the US Federal Reserve funds rate,China’s short-term capital flow scale,interest rate spreads between China and America,US dollar against RMB intermediate price,Shanghai Composite Index and China Manufacturing Purchasing Manager Index to construct the VAR model.Impulse response analysis and variance decomposition analysis yield the following empirical conclusions;The Federal Reserve’s interest rate increase has a significant negative effect on China’s short-term capital flows and is transmitted through multiple channels of interest rates,exchange rates,asset prices,and public expectations.Among them,interest rates are the most stable channel for the Federal Reserve’s interest rate increase to affect China’s short-term capital flows.The interest rate spreads between China and America is significantly positively correlated with China’s short-term capital,The Federal Reserve’s interest rate increase led to China’s short-term capital outflows by narrowing the interest rate spread between China and America;Asset prices are another major channel outside interest rates,the Federal Reserve’s interest rate increase has led to a tightening of dollar liquidity and aggravated US dollar debt burden,thus reducing the Shanghai Composite Index and ultimately leading to short-term capital outflows in China;Public expectations,the China Manufacturing Purchasing Managers Index is highly positively correlated with China’s short-term capital flows,and the Federal Reserve’s interest rate increase has led to short-term capital outflows in China by lowering public expectations of the Chinese market;Compared to the above three transmission channels,the exchange rate channel is not completely smooth,which is mainly due to the fact that China is still implementing the managed floating exchange rate system.Finally,in order to reduce the impact of the Federal Reserve’s interest rate increase on China’s short-term capital flows,this paper proposes policy recommendations to the Chinese government and monetary authorities from the following three aspects:First,increase supervision of short-term capital flows;Second,continue to promote financial markets reform in depth;third,further enhance the ability of financial services to the real economy;Fourth,strengthen international cooperation in international short-term capital flow supervision.The innovations of this paper lie in two aspects:On the one hand,in the existing literatures,there are still shortages in the study of spillover effect of US monetary policy on China.This paper selects the impact of the Federal Reserve’s interest rate increase on China’s short-term capital flows in the post-crisis era,realizing the innovation of research perspective.On the other hand,this paper added the public expectation channel outside the traditional monetary policy spillover channel,enriching the research on the Federal Reserve’s rate increase on China’s short-term capital flow spillover channel,and thus more comprehensively exploring the impact of the Federal Reserve’s interest rate increase on China’s short-term capital flows.