The Chinese Approach to Capital Inflows: Patterns and Possible Explanations

62 Pages Posted: 3 Mar 2006

See all articles by Eswar S. Prasad

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics; Cornell SC Johnson College of Business

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2005

Abstract

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.

Keywords: Financial integration, foreign direct investment, international reserves, external debt, capital controls

JEL Classification: F2, F3, F4

Suggested Citation

Prasad, Eswar S. and Wei, Shang-Jin, The Chinese Approach to Capital Inflows: Patterns and Possible Explanations (April 2005). IMF Working Paper No. 05/79, Available at SSRN: https://ssrn.com/abstract=888125

Eswar S. Prasad (Contact Author)

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Shang-Jin Wei

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