Capital Controls and Interest Rate Parity

Transcription

1 Capial Conrols and Ineres Rae Pariy Evidences from China, LIU Li-Gang & Ichiro Oani

2 Recen Discussions on Capial Conrols During and afer he Asian Financial Crises Example. Malaysia Impossible Triniy --Fixed exchange rae --Free capial mobiliy --Independen moneary policy

3 Previous Empirical Sudies on China Capial Conrols Mosly legalisic inerpreaion of rules and regulaions w.r.. effeciveness and marke inegraion. Quaniaive sudies jus a few. (1) Cheung, Chinn and Fujii (2003) (2) Ma, Ho, and McCauley (2004)

4 Ineres Rae Pariy Theory Jeff Frankel (1992): Theory provides a useful framework for analyzing capial mobiliy quaniaively. Sricly speaking, he covered ineres rae pariy condiion does no hold in he real world.

5 Deviaions from Covered Ineres Rae Pariy [ i k - i - ( f, + k s )] = [( i k - k* k* i ) - ] + ( s e + k - f,+k ) e s + k

6 Componens of Deviaions from he Pariy Condiion Deviaions represen he cos of ransacions Toal, TC, Of which: --TCr,Arbirae risks and exchange risks --TCp, Pure ransacion coss

7 Comparisons of Marke Places Hong Kong: known o be one of he mos open markes. --TC,hk = TCp, hk Onshore marke in China. --TC,on = TCp,on +TCr,on. Cross-border marke in China. --TC,cb = TCp,cb + TCr,cb. Approximaion, TCp,hk = TCp,on = TCp,cb

8 Char 1: Deviaions from Pariy, Q Q Char 1: Deviaions from Ineres Rae Pariy, Q Q Hong Hong Onshore Cross-Border in percen Q4 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4-0.5

9 Deviaions from Pariy Negligible deviaions for Hong Kong. Free capial mobiliy. Negaive deviaions for China s crossborder in early Conrols o discourage ouflows from China. Posiive deviaions for China since 2000: Conrols o discourage inflows ino China.

10 Char 1a: Cos of Transacions, Absolue Values of Deviaions Char 1a: Cos of Transacions, Q Q Hong Kong Onshore Cross-Border 1999Q4 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 in ercen

11 Cos of Transacions Hong Kong: Very small: 0.013% a quarerly rae, mainly fees and charges. China: Dominaed by marke pressures. Cross-border TC > Onshore TC Addiional cos for cross-border ransacions, driving a wedge beween RMB ineres rae for onshore and for cross-border ransacions.

12 2004Q Char 1b: Cos Differenials bw Cross-Border and Onshore, Q Q Series1 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 1999Q4 in percen

13 Table 3: Cos of Capial Conrols and E&O, Table 3: Cos of Capial Conrols and E&O, 1H H 2004 TC of Capial E&O as % of Conrols, in % Trade 1H H H H H H H H H H / Sources; SAFE, PRC and The auhors' calculaion 1/ Eaimaes

14 Some Observaions Transacion coss affeced by capial conrols on a declining rend. Apparen negaive correlaion beween he inensiy of capial conrols and he degree of illegal capial movemens

15 Char 2: E&O vs Cos of Capial Conrols, 1H H E&O as %rade Series1 Linear (Series1) Cos or Capial Conrols

16 Assessing Money Marke Inegraion: Uncovered Ineres Rae Differenials ) ( )] ( [ ) (,, * * e k k k k k e k k k s f s f i i s i i =

17 Properies A) Are uncovered ineres differenials mean revering? B) Are he differenials predicable? C) Are absolue differenials shrinking?

18 A: Are uncovered Ineres Differenials mean revering? Uni roo es: Dicky-Fuller es: Phillips-Perron Tes -saisics: -saisics: DUIP (12): -0.6 DUIP(12): DUIP (24): DUIP(24): DUIP (48): DUIP(48): -1.1

19 B: Are he differenials predicable? Predicabiliy regression resuls: AR(1): (-4.16)*** AR(3): -0.1 (-3.56)*** AR(5): 0.1 (3.56)*** AR(7): 0.006(0.07) AR(9): -0.03(-1.3) AR(11): (-2.62)**

20 C: Are he differenials shrinking? Dependen variable: Absolue value of Differenials: Reg. (1) Reg. (2) Time rend: (14.3)*** Year (-6.43)*** Year (-16.4)*** Year (-33.5)*** Year (-32.3)*** Year (-16.1)* Adjused R SQ:

21 Effeciveness of Capial Conrols in Recen Years: Summary Qualiaively speaking, changes in capial conrols had desired impac on illegal capial movemens (as represened by Es&Os). Quaniaively, he impac was no significan and seems o be waning over ime. Capial conrols drove a wedge bw onshore and offshore ineres raes. Deviaions from uncovered ineres rae pariy are no random and predicable, bu arbirages could no make onshore and offshore ineres raes o converge. Some signs of shrinking differenials.

22 Road Map for Furher Inegraion of he Capial Marke Increase RMB ineres rae and exchange rae flexibiliy and deepening of markes for RMB asses and Forex. Reduce impedimens of financial movemens associaed wih: curren ransacions, long-erm equiy ransacions, & Shor-erm porfolio ransacions.