Short Term International Capital Flow And Systemic Financial Risk Prevention

Since the 1980 s,a notable feature of the world economic and financial crises is that most economic and financial crises have been accompanied by large fluctuations in cross-border capital flows.From the perspective of the history of world financial crises,the economic and financial crises related to international capital flows are mainly manifested in the massive capital outflow,the sharp depreciation of domestic currency,the default of foreign debt,the rapid reduction of foreign exchange reserves,and the spread of market panic,which have an impact on the domestic economic and financial system.In 2009,the European debt crisis first broke out in Greece,the international rating agencies have lowered its rating.Greece's financing costs soared in the international market,accompanied by sovereign debt default risks and capital flight.It has to endure a long time for tightening policy and negotiations with international creditors and capital control measures were implemented in 2015.Meanwhile,the European debt crisis spread to other countries.During the Russian ruble crisis in 2014-2015,capital flight and the plunge in oil prices triggered a sharp depreciation of the ruble.In recent years,China has been facing a complicated economic and financial situation at home and abroad.RMB exchange rate fluctuations have increased,and international capital inflows and outflows have become more frequent and the flow scale has been increasing quickly.Since the beginning of March 2020,due to the outbreak of disease in various countries and the plunge of oil prices,stock markets in many countries have been frequently "shut down",market panic and investors' risk aversion have intensified,and the systemic financial risks rapidly extended to global financial markets such as bonds,foreign exchange,commodity futures and gold.A large amount of short-term international capital flows from developing economies to "safe-haven assets" such as the U.S.dollar,resulting in short liquidity of the U.S.dollar globally.Most non-U.S.currencies are under considerable depreciation pressure,and the economic and financial stability of some countries is threatened.For example,Argentina recently announced the domestic sovereign debt default,the debt risk significantly increased.At the same time,the RMB exchange rate is also under downward pressure to some extent,and the risk of short-term capital flow cannot be ignored.In recent years,from developed economies such as Europe,the United States and Japan to emerging market economies such as India,Brazil and South Africa,countries around the world have once again witnessed weak growth of the real economy and high debt leverage.Systemic risks are gradually accumulating,and the possibility of another global economic and financial crisis is on the rise.In China,the CPC central committee has also set the goal of resolutely winning the "three major battles".Preventing and resolving major risks,especially systemic financial risks is of the most importance.Therefore,in order to establish and improve the macro-prudential policy system for short-term international capital flows and prevent systemic financial risks,it is of great significance to implement the following studies.What is the relationship between short-term international capital flows and systemic financial risks.How to analyse the impact mechanism of short-term international capital flows on systemic financial risks.What is the role of short-term international capital flows in the formation and accumulation of systemic financial risks? How to alleviate the negative impact of short-term international capital flows in the process of capital account opening and the two-way opening-up of financial markets?The main contents of this paper are as follows:Chapter 1 is the introduction.It mainly elaborates the background of the paper's topic selection,puts forward the research questions,introduces the main content,research goals and methods of the paper,summarizes the innovation points of the paper,and points out the shortcomings of the paper and the future research direction.Chapter 2 is a literature review.It systematically sorts out the relevant researches of scholars at home and abroad,and finds out the breakthroughs and possible innovations of this article based on the existing literature.Chapter 3 shows the impact mechanism of short-term international capital flow on systemic financial risk.This chapter points out that short-term international capital flows are an important factor leading to the accumulation of systemic financial risks,and analyzes the specific mechanisms of short-term international capital flows that affect systemic financial risks and studies related theoretical foundations around three channels: debt,asset prices,and exchange rates.Chapter 4 provides the verification of the impact mechanism of short-term international capital flows on systemic financial risks.This chapter measures the systemic financial risks of China's banking industry,and based on the measured systemic financial risk indicators,the debt mechanism,asset price mechanism,and exchange rate mechanism proposed in Chapter 3 that affect the systemic financial risks of short-term international capital flows are separately analyzed.Chapter 5 elaborates the macro-prudential policy based on short-term international capital flows.This chapter mainly summarizes the IMF's policy framework and the current implementation of China's macro-prudential policy tools,and conducts an empirical test on the effectiveness of China's macro-prudential policy tools.Chapter 6 summarizes the previous analysis conclusions.It puts forward some policy recommendations to improve the macro-prudential management of shortterm international capital flows and the research deficiencies of this article and possible further research directions in the future.This paper uses theoretical tools such as the law of diminishing marginal returns,the Douglas production function,the rational expectation bubble model,and the rational expectation exchange rate model,as well as empirical methods such as generalized variance decomposition,vector autoregression,and impulse response to influence the mechanism of systemic financial risk in short-term international capital flows.A more comprehensive study was carried out with a view to gaining a more comprehensive understanding of systemic financial risk prevention and helping to improve China's macro-prudential policy framework.Based on the study of short-term international capital flows and systemic financial risk prevention,this article draws the following main conclusions:1.Short-term international capital flows are an important factor in the accumulation and rapid release of systemic financial risks.2.Short-term international capital flows mainly aggravate systemic financial risks through three channels: debt,asset prices,and local currency exchange rates.3.The large inflow of short-term international capital has aggravated corporate over-debt.Due to diminishing marginal returns,corporate economic benefits have declined,and corporate profits have gradually been unable to cover the principal and interest of debt.They can only maintain the operation of the capital chain by borrowing new and repaying the old,and the leverage ratio has continued to rise,thereby increasing system fragility and accumulates systemic financial risks.4.Short-term international capital flows to speculative assets,which will promote the asset prices.The rise in asset prices will strengthen the expectations of market players,promote the continued prosperity of asset prices,and intensify asset price bubbles and systemic financial risk accumulation.5.There is also a positive feedback loop effect of interaction and mutual causation between short-term international capital flows and the exchange rate of the domestic currency.The large inflow of short-term international capital will push up the local currency exchange rate and exchange rate expectations,raise asset prices,and in turn attract more short-term international capital inflows,leading to overvaluation of the local currency exchange rate,asset price bubbles,and increased system fragility.This two-way relationship forms a new amplification mode for systemic financial risks,leading to further accumulation of systemic financial risks.6.Taking preemptive macro-prudential measures can strengthen the financial system to withstand overall shocks and curb the accumulation of system vulnerabilities over time.On the basis of learning from previous studies,this article has made innovations in the following aspects:1.This article applies the law of diminishing marginal returns of inputs of production factors to the study of the impact of short-term international capital flows on systemic financial risks,and analyzes mechanism of the effect of short-term international capital flows on systemic financial risks through debt channels,with respect to the law of diminishing marginal returns of inputs of production factors.Market entities generally have strong motives for asset expansion.When the economy is booming,corporate earnings expectations increase,attracting more short-term international capital flows into the country.Short-term international capital is essentially a kind of debt fund.When a large amount of it flows into domestic enterprises,it will aggravate the excessive debt behavior of enterprises.Short-term international capital,like the investment of domestic debt funds,is also an input of production factors.Under the effect of the law of diminishing marginal returns of production factors input,after a certain limit,the company's profit rate on assets continues to decline.In order to repay the principal and interest of debts,companies can only continue to increase leverage,and the macro leverage ratio continues to increase,thus continuing to accumulate systemic financial risks.2.This article draws on the asset bubble theory and the asset bubble generation mechanism and random bubble burst mechanism in the financial crisis theory,and incorporates a unified dynamic analysis framework on the basis of simplifying the two micro-mechanisms to analyze the mechanism of self-materialization of asset price bubble and the accumulation systemic financial risks after the short-term international capital promotes asset prices.When debt ratios are too high and real economic benefits decline,both banks and companies have the incentive to invest debt funds in speculative assets to reduce risk exposure or increase investment returns.Under the basic framework of the rational expectation bubble model,the asset price bubble self-materialize after the debt fund promotes the rise of asset prices.With the formation of asset price bubbles,systemic financial risks continue to accumulate,which is reflected in the continuous rise of social leverage ratio indicators and probability of bubble bursting.Due to the two-way relationship between short-term capital flows and exchange rates,this two-way relationship forms a new mode for systemic financial risks to be amplified,leading to further accumulation of systemic financial risks.Although this paper follows a relatively complete research logic and carries out corresponding empirical tests on the overall research framework,there are still some problems that need to be further explored.To what extent is there a connection between short-term international capital flows and economic structural imbalances,economic entities' soft budget constraints,monetary policy and fiscal policy abuse,etc.The mechanism and degree of influence of these factors on systemic financial risks are all major topics to be studied.Due to space and research capabilities,this article only mention the subject and needs to be discussed in depth in future research.In addition,the measurement methods of our country's systemic financial risks and the empirical test of the effectiveness of macro-prudential policy tools also need to be further improved in future research.