The Chinese Approach to Capital Inflows: Patterns and Possible Explanations

April 1, 2005

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Shang-Jin Wei, and Eswar S Prasad. The Chinese Approach to Capital Inflows: Patterns and Possible Explanations, (USA: International Monetary Fund, 2005) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In this paper, we adopt a cross-country perspective to examine the evolution of capital flows into China, both in terms of volumes and composition. China's inflows have generally been dominated by foreign direct investment (FDI), a pattern that appears to be favorable in light of the recent literature on the experiences of developing countries with financial globalization. We provide a detailed documentation of the evolution of China's capital controls, a proximate determinant of the pattern of capital inflows. We also discuss a number of other intriguing hypotheses that attempt to capture the "deeper" causes underlying China's approach to capital flows. In particular, we argue that some popular mercantilist-type arguments are inconsistent with the facts. We also analyze the recent rapid rise of China's international reserves and discuss its implications. Contrary to some popular perceptions, the dramatic surge in foreign exchange reserves since 2001 is mainly attributable to non-FDI capital inflows, rather than current account surpluses or FDI.

Subject: Balance of payments, Capital inflows, Central banks, Emerging and frontier financial markets, External debt, Financial markets, Foreign direct investment, International reserves

Keywords: A lot of China's FDI, Capital controls, Capital inflows, Composition of inflow, Emerging and frontier financial markets, External debt, FDI incentive, FDI inflow, FDI outflow, FDI regime, FDI share, Financial integration, Foreign direct investment, Foreign exchange, Foreign reserve holding, Global, International reserves, Outflows from China, Reserve holding, U.S. dollar, WP

Publication Details

Pages:

61
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/079
Stock No:

WPIEA2005079
ISBN:

9781451860986
ISSN:

1018-5941

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