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Hot money inflows and monetary stability in China: how the People's Bank of China took up the challenge

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  • Vincent Bouvatier

Abstract

Nonforeign direct investment capital inflows in China were particularly strong in 2003 and 2004. They have led to a rapid accumulation of international reserves and they may have provided excess liquidity to the Chinese economy. This article, investigates how the central bank of China managed the rapid build-up of international reserves in 2003 and 2004. The relationship between real international reserves and real domestic credit is examined with a Vector Error Correction Model, estimated on monthly data from January 1997 to March 2006. Empirical results show that this relationship was negative, which suggests that the central bank succeeded in slowing down real domestic credit when real international reserves increased. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China proceeded to control domestic credit.

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  • Vincent Bouvatier, 2010. "Hot money inflows and monetary stability in China: how the People's Bank of China took up the challenge," Applied Economics, Taylor & Francis Journals, vol. 42(12), pages 1533-1548.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:12:p:1533-1548
    DOI: 10.1080/00036840701721513
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    3. Agyenim Boateng & Vu Hong Thai Nguyen & Min Du & Frank O. Kwabi, 2022. "The impact of CEO compensation and excess reserves on bank risk-taking: the moderating role of monetary policy," Empirical Economics, Springer, vol. 62(4), pages 1575-1598, April.
    4. Tsai, I-Chun & Chiang, Ming-Chu & Tsai, Huey-Cherng & Liou, Chia-Ho, 2014. "Hot money effect or foreign exchange exposure? Investigation of the exchange rate exposures of Taiwanese industries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 75-96.
    5. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.
    6. Thai V. H. Nguyen & Agyenim Boateng & Tra Thi Thu Pham, 2019. "Involuntary excess reserve and heterogeneous transmission of policy rates to bank lending rates in China," Empirical Economics, Springer, vol. 57(3), pages 1023-1044, September.
    7. Mingming Li & Fengming Qin & Zhaoyong Zhang, 2021. "Short-Term Capital Flows, Exchange Rate Expectation and Currency Internationalization: Evidence from China," JRFM, MDPI, vol. 14(5), pages 1-15, May.

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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