Study On Short-term Capital Flow And Hedging Ability Under Multiple Motivations

As the speed of economic growth slows down and market-oriented reforms continuously deepens,China’s economy begins to face a series of new challenges.The massive decline in foreign exchange reserves in recent years,the increased volatility of RMB exchange rate and the negative gap in interest rate between China and the U.S.have forced multiple adverse factors to increase the pressure on China’s capital outflows day by day.Since 2015,the situation of China’s short-term capital flow has changed from mutual access to sustained outflows.Although China has become the world’s second-largest economy,the trend of capital outflows is still and continues to worsen.The fluctuation of RMB exchange rate,the resonance of internal and external risks and the rise and fall of domestic asset prices have been the focus of market attention and expert research.Meanwhile the dividends of China’s economic development also attracts some multinational investors who continue speaking highly of China’s economy.So,what is the real reason for the seemingly contradictory statement above? In this context,it is of great practical significance to study the harsh situation of China’s shorterm capital outflow and bright future development opportunity under the sight of investors who do a research about multiple motivations of China’s short-term capital flows and China’s long-term position of risk aversion.This paper use data about short-term capital flows,interest spread,exchange rate spread,asset price spread and global risky factor from January 2008 to December 2021.By inputing these time-varying datas into TVP-VAR model and choosing different ahead-periods and important time spots,this paper analyze the impulse response of each factor.The results show that: first,short-term capital flows have a certain positive momentum,the current inflow and outflow trend will continue to play a role in later periods,which can be explained by China’s capital account control.Second,China’s risk-free interest rate has been the earning target of cross-border investors for more than a decade,which is also the main factor of short-term capital inflows and immune to external risks.Third,as China’s stock market system is still not sound,it is probably difficult for China’s risk assets to gain the capital of multinational investors,high-risk and low-yield stock market returns is hard to absorb more arbitrage funds to support the development of local industries.Fourth,unlike the expected appreciation of RMB,the short-term capital outflow is closely related to the expected depreciation of the RMB,especially after the reform of the exchange rate market.Exchange rate arbitrage is still the most important factor to short-term capital flow.Furthermore,China’s risk-averse ability mainly focuses on external risks,while internal economic policy and environmental adjustment will increase the volatility of indicators.Whether the mood in market is favorable for the new policy or not needs a appropriate period to see.Based on the above conclusions,this paper puts forward the following suggestions:capital account needs to be opened properly and in an orderly manner;keep eye on the reversal of interst spread under mismatch of economic cycle between China and US;set a faster pace for establishing toal risky asset markets;set up mechanism to manage expectations of RMB depreciation;maintain a gradual and steady pace of internal economic policy adjustments.