Study On The Effectiveness Of China’s Capital Controls

One goal of China’s reform of the financial system is to achieve RMB capital account liberalization. In recent years, China’s capital control policies are becoming more and more relaxed. With the continuous improvement of the level of China’s opening up, China’s capital controls face growing challenges. If it continues to maintain strict controls of capital flows, China will have to pay increasing costs. Therefore, it is necessary to study the effectiveness of China’s capital controls. On the one hand, it will helps us to think about how to strengthen the efficiency of China’s capital controls; On the other hand, it will help us to analyze how to realize capital account convertibility.In this paper, on the basis of a brief review of China’s capital control policies, we analyzed the necessity and cost of China’s capital controls. Then we proposed the standards of measuring the effectiveness of China’s capital controls, such as the influence of capital controls on the size and structure of capital flows, the ability to maintain the independence of monetary policy and the ability to maintain the stability of the RMB exchange rate. Firstly, this article analyzed the relationship between China’s capital control policies and the size and structure of capital flows, then we reach conclusions of the effectiveness of capital controls on guiding capital flows; secondly, we used the quarterly data from2001to2012, select five variables which include interest spreads at home and abroad, the fluctuation of foreign Exchange Reserves, the expected changes of RMB exchange rate, the capital flows and the capital controls intensity, then we set up VAR model. Through the VAR model we can reach the following conclusions:China’s capital control policies are effective in the short term, the long-term effectiveness is waning; in the period when the economic environment keep stability, capital controls have played a positive role in realizing policy objectives, while, in the period when the economic environment is instable, capital controls has greater limitations in achieving its policy goals; with the improvement in the level of China’s opening up, the effectiveness of the capital controls is becoming weaker and weaker. According to the conclusions of the capital controls, we proposed some policy recommendations, such as China should implement capital control policies flexibly; pay more attention to the economic means of regulating international capital flows; promoting RMB capital account liberalization prudently and so on.