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Capital Controls and Capital Flows in Emerging EconomiesPolicies, Practices, and Consequences$
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Sebastian Edwards

Print publication date: 2007

Print ISBN-13: 9780226184975

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226184999.001.0001

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The Chinese Approach to Capital Inflows

The Chinese Approach to Capital Inflows

Patterns and Possible Explanations

(p.421) 9 The Chinese Approach to Capital Inflows
Capital Controls and Capital Flows in Emerging Economies

Eswar Prasad

Shang-Jin Wei

University of Chicago Press

This chapter summarizes China's experience with capital flows and capital account restrictions. China may have benefited greatly in terms of enhancing the risk-return trade-offs. There is no clear evidence that the buildup of reserves in China has significant direct sterilization costs, although it could have some efficiency costs and also expose the balance sheet of the People's Bank of China (PBC) to some exchange rate and capital risks. While Chinese laws and regulations provide many legal incentives to attract foreign direct investment (FDI), they should be directed in context along with many implicit disincentives and explicit legal restrictions in order to form a more complete assessment of the overall investment climate. It can be said that China has done well so far in managing the risks linked with financial globalization, but major challenges remain to ensure that continued integration with financial markets does not worsen the risk-return trade-off.

Keywords:   capital flows, capital account, China, risk-return trade-offs, balance sheet, foreign direct investment, financial globalization, financial markets

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