Research On Short-term Capital Flow And RMB Exchange Rate Stability

After China’s accession to the WTO at 2001,great progress has been made in the opening of China’s capital account.Apart from the overall easing of capital controls in direct investment field,major breakthroughs have been made in the opening of the securities market.Connectivity mechanisms such as Shanghai-Hong Kong Stock Connect,Shenzhen-Hong Kong Stock Connect had been opened one after another,bringing great convenience to domestic and foreign investors.At the same time,China’s short-term capital flow fluctuated greatly.Since the economy entered the "new normal"in 2014,the scale of short-term capital outflow increased significantly,and the pressure of exchange rate fluctuation had increased correspondingly,even affecting the stability of the financial system.Under the superposition of the gradual opening of the capital market and exchange rate reform,it is still unknown what changes will take place in the dynamic mechanism of short-term capital flow and RMB exchange rate.This paper first makes a theoretical analysis of short-term capital flow and exchange rate stability,and discusses the change of relevance between short-term capital flow and exchange rate stability from the perspective of capital account opening by constructing a heterogeneous risk preference cross-border investment model.Finally,on the basis of measuring the de-facto index of capital account opening and the scale of short-term capital flow,combined with the changes of RMB exchange rate since the 2008 financial crisis,this paper uses the Timevarying Parameter Vector Autoregressive Model(TVP-SV-VAR)for empirical test.The empirical results show that:(1)The currency arbitrage motivation of China’s short-term capital flows is always tenable.The impact of spot exchange rate on shortterm capital flow is increasing.Compared with spot exchange rate,exchange rate expectation has a stronger guiding effect on short-term capital flow.(2)Capital account opening plays a "valve" role in the mechanism of short-term capital flow and exchange rate.As the first practice of China’s connectivity mechanism,the opening of ShanghaiHong Kong Stock Connect is of great significance to China’s capital account opening.After that,the positive impact of exchange rate appreciation on short-term capital flow has increased.(3)Capital account opening directly attracts short-term capital inflow and increase the fluctuation of RMB exchange rate.Since 2014,the attraction of China’s capital deregulation to international short-term capital has declined.Finally,based on the conclusion of empirical analysis,combined with the actual situation of China,this paper puts forward the corresponding policy recommendations,which can provide some reference for China to prevent the risk of short-term capital flow and exchange rate fluctuation.