China's Capital Controls – Through the Prism of Covered Interest Differentials
Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 14/2013
Pacific Economic Review, Volume 19, Issue 1, February 2014, Pages: 112–134
32 Pages Posted: 25 Sep 2013 Last revised: 28 Jul 2022
There are 3 versions of this paper
China's Capital Controls - Through the Prism of Covered Interest Differentials
China's Capital Controls – Through the Prism of Covered Interest Differentials
China's Capital Controls – Through the Prism of Covered Interest Differentials
Date Written: September 25, 2013
Abstract
This working paper was written by Yin-Wong Cheung (City University of Hong Kong and Hong Kong Institute for Monetary Research) and Risto Herrala (Bank of Finland).
We study the renminbi (RMB) covered interest differential – an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China’s policy.
Keywords: NDF Implied RMB Interest Rate, Capital Controls, Asymmetric Response, Macro Determinants, Credit Market Tightness
JEL Classification: E44, F31, F32
Suggested Citation: Suggested Citation