Managing Capital Flows

Managing Capital Flows

The Search for a Framework

ADBI series on Asian Economic Integration and Cooperation

Edited by Masahiro Kawai and Mario B. Lamberte

Managing Capital Flows provides analyses designed to help policymakers develop a framework for managing capital flows that is consistent with prudent macroeconomic and financial sector stability.

Chapter 8: Managing Capital Flows: The Case of the People’s Republic of China

Yongding Yu

Subjects: asian studies, asian economics, development studies, development economics, economics and finance, asian economics, development economics


Yongding Yu INTRODUCTION 8.1 Since 1979 the economy of the People’s Republic of China (PRC) has grown at an average annual rate of 9.7 per cent, making the PRC the world’s fourth largest economy, just behind the US, Japan, and Germany. Surprisingly, the PRC economy has a very liberal trade regime and a trade/GDP ratio surpassing 67 per cent, much higher than either the US or Japan. The PRC is also the world’s third largest recipient of foreign direct investment (FDI), with inflows of about $50–60 billion per annum, and the third largest capital exporting country with a current account surplus of about $200 billion in recent years. The successful management of cross-border capital allowed the uninterrupted growth of the PRC’s economic miracle. For example, despite the PRC’s fragile financial system, the yuan escaped attacks by international speculators during the Asian financial crisis owing to capital controls. The PRC has also achieved an average growth rate of over 10 per cent for five consecutive years since 2002 while keeping inflation under control, despite the great pressure on the yuan to appreciate. However, the macroeconomic situation has changed since 2007. The PRC’s internal and external imbalances and inflation have worsened; and asset markets have become increasingly volatile. This chapter argues that the adequate management of cross-border capital flows is the key to the PRC’s stable growth path. It aims to provide a comprehensive account of the evolution of the PRC’s management of capital flows and to analyze possible trajectories for...

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