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

Multiple version iconThere are 3 versions of this paper

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

Institute for Monetary and Financial Research, Hong Kong, China's Capital Controls – Through the Prism of Covered Interest Differentials (September 25, 2013). 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, Available at SSRN: https://ssrn.com/abstract=2330703 or http://dx.doi.org/10.2139/ssrn.2330703

Hong Kong Institute for Monetary and Financial Research (Contact Author)

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