China's Capital Controls - Through the Prism of Covered Interest Differentials

32 Pages Posted: 4 Sep 2013

See all articles by Yin-Wong Cheung

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance; University of California, Santa Cruz - Department of Economics; University of California at Santa Cruz - Department of Economics

Risto Herrala

European Central Bank (ECB) - Directorate General International and European Relations

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Date Written: August 30, 2013

Abstract

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: E440, F310, F320

Suggested Citation

Cheung, Yin-Wong and Herrala, Risto, China's Capital Controls - Through the Prism of Covered Interest Differentials (August 30, 2013). CESifo Working Paper Series No. 4377, Available at SSRN: https://ssrn.com/abstract=2319868

Yin-Wong Cheung (Contact Author)

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

435 Engineering 2
Santa Cruz, CA 95064
United States
831-459-4247 (Phone)
831-459-5077 (Fax)

University of California at Santa Cruz - Department of Economics ( email )

1156 High Street
Santa Cruz, CA 95064
United States

Risto Herrala

European Central Bank (ECB) - Directorate General International and European Relations ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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