The Chinese Approach to Capital Inflows
The Chinese Approach to Capital Inflows
Patterns and Possible Explanations
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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