Facilitation of Cross-border Investment and Financing,Capital Flows and Economic Stability
With the ongoing facilitation of cross-border investment and financing,such as the Shanghai(Shenzhen)-Hong Kong Stock Connect schemes,China's financial liberalization has entered a critical phase.Global experience indi-cates that capital account liberalization is often accompanied by large-scale capital inflows or outflows,even triggering fi-nancial crises and economic turmoil.China's capital account liberalization has its own features,i.e.,Hong Kong plays an important role as an intermediary for cross-border capital flows into and out of the mainland of China.The share of the mainland's foreign direct investment(FDI)from Hong Kong has exceeded 60％since 2013,and the share of the main-land's outward FDI directed to Hong Kong has exceeded 50％since 2012.Based on the above facts,this paper intends to explore the pattern of cross-border capital flows under the facilitation of cross-border investment and financing in the mainland of China,and to investigate mechanisms by which external risk shocks affect capital flows and economic stabil-ity,and particularly explain the role of the facilitation of cross-border investment and financing between the mainland and Hong Kong.We extend the theoretical framework of a small open economy to construct a three-region DSGE model by incorpo-rating the mainland of China,Hong Kong of China and the U.S.to highlight Hong Kong's pivotal role as a capital flow in-termediary for the mainland,we assume asymmetric financial openness.Specifically,the mainland of China opens its capital markets to Hong Kong of China while keeping capital controls on the U.S.We obtain three main findings.First,the facilitation of cross-border investment and financing allows the mainland and Hong Kong to form a complementary capital-flow cycle to mitigate capital outflows and economic volatility caused by risk premium shocks.For example,when a risk premium shock from the mainland of China to the U.S.occurs,it di-rectly leads to capital outflows from the mainland.However,the facilitation of cross-border investment and financing leads to capital inflows from Hong Kong to the mainland,and the capital flows show a complementary capital flow cycle from the mainland of China to the U.S.,from Hong Kong to the mainland,and from the U.S.to Hong Kong of China.Sec-ond,the complementary capital-flow cycle can significantly reduce the economic instability and output decline caused by risk premium shocks at a later stage,lowering the loss of social welfare.Third,during the market panic period,the complementary capital-flow cycle tends to collapse,exacerbating capital flights from the mainland of China to Hong Kong of China and the U.S.and economic instability,leading to a large negative deviation of aggregate output from steady state and great welfare losses.The results imply some policy insights:firstly,enhance the facilitation of cross-border investment and financing be-tween the mainland and Hong Kong,such as expanding the capacity of Shanghai(Shenzhen)-Hong Kong Stock Con-nects;secondly,strengthen financial regulatory cooperation and risk prevention collaboration between the mainland and Hong Kong against the international risk;lastly,establish a real-time market sentiment monitoring system to keep abreast of changes in market sentiment and proactively manage expectations.Our work contributes to several strands of literature.Firstly,we extend the traditional small open economy model by including the mainland of China,Hong Kong of China,and the U.S.in a framework with asymmetric financial openness.The model provides an alternative framework for analyzing Chinese capital flows.Secondly,our paper enriches the study of capital flows in China by revealing how the facilitation of cross-border investment and financing affects capital flows between the mainland and Hong Kong.Theoretically,the facilitation will form complementary capital-flow cycles be-tween these two regions under risk premium shocks.Thirdly,our paper models market panics from a new perspective of the"chain reaction"of risk premium shocks,and explains how the panic disrupts the capital-flow cycle,leading to wide-spread capital flights and large economic fluctuations.A useful extension of our paper would be to incorporate the effects of macroprudential regulations that prevent ab-normal capital flows into the model,or to endogenize the market sentiment to investigate its effects on capital flows.
Cross-border Capital FlowsOpen Economy ModelFinancial StabilityExpectation Management
万方数据
维普
