Host Country’s Capital Controls And China’s Margins Of Overseas Investment:Evidence From Chinese Listed Companies

Since the international financial crisis in 2008,control measures for cross-border capital flows in various countries have emerged one after another.In recent years,the capital account liberalization in some western countries has experienced a historic regression and there have been frequent incidents of Chinese overseas investment being hit by host country’s capital controls.It is imminent to study the relationship between the two deeply.Under this circumstance,this thesis takes Chinese listed companies as the research object,trying to study the static and dynamic impact of capital controls on margins of Chinese companies’ overseas investment,and provides countermeasures.First of all,based on the review of the existing literature,this thesis puts forward theoretical hypotheses that need to be studied in depth.Firstly,the implementation of host country’s cross-border capital controls will have a negative impact on the margins of overseas investment.Secondly,host country’s capital controls mainly suppress margins of overseas investment by increasing the financial cost of the companies.Thirdly,bilateral investment agreements can alleviate the negative impact of financial constraints on the margin of overseas investment to a certain extent.Fourthly,the trend that the current capital control level is more open or closed than the previous period will have an asymmetrical impact on overseas investment.Fifthly,the difference in the degree of capital account openness of different economies will deflect the flow of companies’overseas investment.Second,this thesis matches the 2002-2018 Chinese corporate-level micro data from Zephyr global mergers and acquisitions database,fDi Markets global greenfield investment database and CSMAR overseas direct investment database,obtains capital controls data from the dataset constructed by Fernandez et al.(2016),and describes the stylized facts that host country’s capital controls affect margins of overseas investment.Based on this,this thesis tests the relationship between host country’s capital controls and China’s margins of overseas investment empirically.The benchmark regression results show that capital controls have had a significant negative impact on both the intensive and extensive margins of overseas investment,which is still robust after applying a series of robustness test methods.The heterogeneity test also shows that the negative impact is more obvious for the enterprises with high sunk costs,non-state-owned,not along the "Belt and Road" or cross-border M&A.The mechanism test finds that host country’s capital controls mainly suppress the intensive margin of overseas investment by increasing the level of financial constraints of Chinese overseas investment companies and bilateral investment agreements signed by China and the host country can have a mitigation effect.Third,this thesis further explores dynamic effects of capital controls affecting overseas investment,and forecasts the dual margins of overseas investment based on random forest model.On the one hand,the test of the dynamic effects finds that the asymmetric effect of capital controls is mainly reflected in the effectiveness of the relaxation situation but the ineffectiveness of the tightening situation.Capital controls of neighboring economies of a certain host country or region promote the intensive margin of overseas investment in the certain host country or region;however,capital controls don’t have the above effect on the extensive margin of overseas investment.On the other hand,compared with other host countrylevel factors,the impact of capital account liberalization cannot be underestimated.Companies should focus on improving their own hard power and government support should be tilted towards small companies in the process of overseas investment.Finally,on the basis of summarizing main research conclusions,this thesis provides useful enlightenments for Chinese companies to deal with different host country’s capital controls from three aspects:companies themselves,financial institutions,and government departments.It emphasizes that overseas investment companies should take precautions and focus on broadening financial channels.Financial institutions should accelerate their overseas deployment and provide more financial and information consulting support for companies.Relevant government departments should call on countries and regions around the world to relax capital controls and actively promote the negotiation and implementation of bilateral investment agreements.