The Relationship Between International Short-term Capital Flows And China’s Official Foreign Exchange Reserves

As financial globalization appears to be an unstoppable trend, the world economy becomes more tightly integrated. Movements of short-term capital between countries have generally been referred to as a direct or indirect source of financial crisis. The effects of international short-term capital flows vary among different countries.During1990’s financial crises, a lot of countries suffered a surge of capital flight, and their official foreign exchange reserves declined. Because that these countries did not have enough official foreign exchange reserves, they were in troubles of disturbance and instability. Since2000, the official foreign exchange reserves in the world have increased rapidly, especially in the emerging and developing economies, which have been regarded as an effective measure against financial crises.Official foreign exchange reserves have been increasing rapidly in China. However, in2012, there were a huge number of net outflows of international short-term capital, and official foreign exchange reserves increased slowly. Whether international short-term capital flows can become a vital factor inducing financial crisis in China deserves investigation. Therefore, this paper focused on the relationship between international short-term capital flows and official foreign exchange reserves in China.Through the research of the thesis, the author got the following main viewpoints:1. International short-term capital flows may have considerable negative effects on China’s official foreign exchange reserves under the condition of financial crisis. If our economy maintains stable with rapid economic growth, the outflows of international short-term capital may not impact our official foreign exchange reserves.2. If international short-term capital flows cause considerable negative effects on China’s official foreign exchange reserves, the negative effects will last for a long time.3. When international investors expected that sharp fluctuations will occur in future and there is a high global risk aversion in capital market, China’s official foreign exchange reserves could decline.4. So far the China’s economy has not exhibited symptoms of financial and economic crisis. The slowly growth of official foreign exchange reserves in China these days is not due to the huge number of capital flights.5. The fluctuation of official foreign exchange reserves in China does not have effect on international capital market, but it has effect on short-term capital flows in China. When the scale of reserves becomes more and more huge, it will attract large international short-term capital flows.6. Recently, the movement of international short-term capital in China is within the normal range. It cannot lead to financial crisis.7. The high-speed growth of official foreign exchange reserves in China has been changed.The structure of the paper was as follows.Section1reviews related researches about international short-term capital flows and official foreign exchange reserves. Section2introduces important theoretical analysis about international short-term capital flows and official foreign exchange reserves, meanwhile this section analyzes the relationship between them in times of financial crisis. Section3measures the scale of international short-term capital flows in China, interprets three influential factors of China’s official foreign exchange reserves and discusses the relationship between them. The empirical analysis based on VAR model is in section4. Some policy implications are presented in section5.