A Study On U.S. Monetary Policy's Impact On China's Short-term Capital Flows

Short-term capital flow will severely affect the national economy and American monetary policy change will lead to sharp fluctuations in short-term capital.The Federal Reserve announced the exit of the quantitative easing policy in 2014.With the RMB exchange rate reform in 2015,the dollar gradually went into interest rate raising cycle,which suddenly increased China's international short-term capital outflow pressure.At the same time,China's foreign exchange reserves fell below three trillion in 2016.In recent years,China's capital and financial accounts deficit and surplus appear alternately,marking that the volatility of China's international capital liquidity(especially short-term capital)has been significantly enhanced.I think that the unpredictability of the monetary policy at home and abroad is one of the most significant reason causing the circumstance.Looking at the global situation,developed countries have implemented differentiated monetary policies.The United States has exited from the quantitative easing policy and entered the interest rate rising cycle while Japan and the Euro Zone are still struggling in endless QE policy.The monetary policy differences in developed economies caused great uncertainty on worldwide liquidity tightness in the future.In China,views on how the future interest rate changes are not consistent,either.The uncertainty of interest rate expectations,together with the uncertainty of exchange rate changes,has brought great challenges to the short-term capital liquidity management under the new economic situation.Under this background,the literature firstly combs the study on the spillover effects of U.S.monetary policy changes,mainly focuses on the analysis of how monetary policy changes will lead to the changes of China short-term capital flow.Then the literature analyzes the theoretical basis and the mechanism of the impact of U.S.monetary policy on China's short-term capital flows,and further make assumptions on the changes of China's short-term capital flows according to current situation:America's monetary policy affects China's short term capital flow by changing interest rate difference and exchange rate difference between China and America.In the empirical part,this paper selects China's short-term capital flow,US monetary policy index,interest rate gap,the RMB exchange rate and domestic asset prices as variables,then constructs a VAR model to quantitatively analyze the impact of U.S.monetary policy on Chinese short-term capital flows.The empirical results show that the tightening monetary policy of the Fed will lead to outflow of China's short-term capital.The interest rate channel and exchange rate channel of the U.S.monetary policy has obvious effect on China's short-term capital flows,China should pay enough attention to the potential systemic risk brought by massive capital outflow caused by the shift of U.S.monetary policy.Finally,this paper puts forward policy recommendations from the aspects of China's institutional reform and strengthening the ability of short-term capital management and control.