Mechanism Of International Financial Capital Movement And Current Excess Liquidity In China

Under the circumstances of globalization and integration, international financial capital movement is important economic phenomenon. With the securitization intensified of capital movements and fast development in derivatives markets, international financial capital is playing a more vital role in international capital markets. While they provide capital for each country and promote optimization of capital, they also spread excess liquidity all over the world that is the right external causes for excess liquidity in less developed countries. As China's economy is growing very fast, financial capital keeps flowing in on a large scale through normal and hidden channels, thus causing shock to our economic and financial system. Therefore, it is of great importance in theory and reality to study the related problems of international financial capital movement.This research is composed of three parts. As the theory basis, the first part studies the concept, classification and evolution of financial capital. For the second part, the key theoretic framework, it analyses the main affecting factors and the corresponding mechanisms deeply. In the last part, the research target is achieved. We study the international background of our current excess liquidity, estimate the scale of international financial capital flow in and out of China. We also demonstrate the determinants of financial capital flow into China. Finally, some measures and policies are suggested.In light of latest developments of international financial markets, financial capital is endowed with new implications after we display the concrete meanings of financial capital in different times through reviewing the historic evolution of financial capital. As the stratosphere of capital, financial capital invests exclusively in different financial assets aimed at maximizing profits. Industrialized countries are utilizing home currencies to dominate the whole world and lead to form international financial capital. International financial capital has its own unique characteristics as well as common features of monetary capital. According to the targets of movements, international financial capital includes speculative capital and investment capital. International financial capital movement evolves with international monetary system. With the world currency changing from Pound to US dollar and multi-international currencies, the scale of financial capital is becoming larger and larger. At any time, the countries which home currencies are internationalized play the key role.On the basis of classical theories, pull and push factors as well as economic effects are investigated in the second part. Through solid study, we find some results. Firstly, push factors include some external forces that push financial capital into a country such as world interest rate, world output and contagion. Through expanding and contracting the global credit supply, world interest rate affects international financial capital movement. World output exerts influence on financial capital through income effect and substitution effect which. Income effect can increase the capital flowing to financial markets while substitution effect tends to decrease the capital flowing to financial markets. Contagion affects the equilibrium price directly or indirectly through signal and liquidity. Secondly, pull factors refer to the internal motivations including basic economic variables, price indexes and transaction cost. Basic economic variables are composed of some macro-economic variables which can reflect the risk, profitability and liquidity of one country on the whole. They consist of domestic output, inflation, current items, foreign reserve, financial deepening, privatization and state credit ratings etc. Price indexes include domestic interest rate and exchange rate. In addition, as a deduction to profits, transaction cost can affect financial capital movements. Thirdly, international financial capital plays a significant role in economy. (A)Capital inflow will lead to economic growth, real effective exchange rate appreciation, international reserve increasing steadily and inflation through expanding money supply and investment. (B)Financial capital inflow also plays a significant role in micro-economy. Fourth, international financial capital inflow will also lead to disequilibrium to internal and external economy which may cause financial crisis in the end.After understanding the theories about international financial capital movements, we investigate the international background of current excess liquidity in China deeply, then we also examine the main affecting factors through econometric tools and put forward some policies. The main results is as follows: (l)China's current excess liquidity is a kind of comprehensive economic phenomenon that can be explained from different angles such as macro-economy, micro-economy and system. Under the current international monetary system, it is the movement of international financial capital that causes the excess liquidity spreading throughout the whole world. Large-scale financial capital inflow is thought to be the external root for excess liquidity in most less developed countries. (2)The inflow and outflow of financial capital in China can either be seen from BOP items such as portfolio investment, other investment and errors and omissions, or the hidden capital. The estimation about financial capital into or out of China shows that it is characterized with bi-direction, and hidden capital account for a larger share in total capital. We find that outflow of capital will decrease the capital inflow in short time, but increase inflow of capital in the long run. (3)Both push and pull factors affect international financial capital movement in China rather than interest rate and exchange rate. Therefore, we should emphasize more on domestic balance than external balance. The target of exchange rate stability should be transformed to macro-control policy to make the monetary policies more flexible and independent. To decrease the scale of inflow and lower the uncertainty of capital movement, capital account should be liberalized gradually in order. Finally, Chinese government ought to understand that US and Japanese economy development affect international capital in other countries differently so that corresponding measures can be adopted to improve the financial flow.