Hot money inflows and monetary stability in China: how the People's Bank of China took up the challenge

Nonforeign direct investment capital inflows in China were particularly strong in 2003 and 2004. They have led to a rapid accumulation of international reserves and they may have provided excess liquidity to the Chinese economy. This article, investigates how the central bank of China managed the ra...

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Bibliographic Details
Published in:Applied economics 2010-05, Vol.42 (12), p.1533-1548
Main Author: Bouvatier, Vincent
Format: Article
Language:English
Subjects:
Bank liquidity
Capital flow
Capital movement
Causality
Central banks
China
Correlation analysis
Foreign investment
Inflation rate
Interest rate policy
Monetary economics
Monetary policy
Money supply
Stabilization policy
Studies
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Summary:Nonforeign direct investment capital inflows in China were particularly strong in 2003 and 2004. They have led to a rapid accumulation of international reserves and they may have provided excess liquidity to the Chinese economy. This article, investigates how the central bank of China managed the rapid build-up of international reserves in 2003 and 2004. The relationship between real international reserves and real domestic credit is examined with a Vector Error Correction Model, estimated on monthly data from January 1997 to March 2006. Empirical results show that this relationship was negative, which suggests that the central bank succeeded in slowing down real domestic credit when real international reserves increased. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China proceeded to control domestic credit.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036840701721513