Finding reasonable measures to regulate cross-border capital flows and exploring effective policy means to prevent cross-border capital flow risks is not only the ultimate foothold of research, but also the embodiment of application value.
The negative impact of cross-border capital flows
Cross-border capital flows will have a multi-faceted and deep-seated impact on China's financial system, so it is necessary to deeply grasp the multiple impacts of cross-border capital flows on financial stability.
Exploring reasonable and effective coping strategies is of great practical significance at present, which will help to manage and respond to the negative impact of cross-border capital flows more scientifically, and prevent and avoid excessive impact on cross-border capital flows.
We will conduct an in-depth examination of the effectiveness of macro-prudential policies and capital controls on cross-border capital flows, with the main goal of regulating the scale and extreme capital flows of cross-border capital flows.
The importance of this research lies in the fact that it will not only help to improve China's external risk prevention and control capabilities, enhance the resilience of the financial system, and maintain financial stability, but also provide useful solutions to these goals.
Cross-border capital flow, as the essential manifestation of the opening of the capital account, is a phenomenon caused by the international allocation of assets after comprehensive consideration of returns and risks by market players, and is a manifestation of the allocation of resources according to the market. According to the neoclassical theory of economic growth, cross-border capital flows should contribute to financial stability because they can diversify investment risks, improve the efficiency of capital allocation, and achieve international risk sharing. In contrast, in the first decade of the 20th century, a large number of countries implemented financial opening policies, which led to large-scale cross-border capital flow shocks, and then suffered financial crises.
Since then, scholars have come to realize that cross-border capital flows may not contribute to financial stability by making countries with fragile financial systems more vulnerable to speculative attacks. The negative impact of cross-border capital flows on financial stability has begun to receive widespread attention, and a large number of scholars have carried out multi-angle and in-depth exploration of the financial stability issues that may be caused by cross-border capital flows.
Cross-border capital flows, also known as international capital flows, refer to the movement of capital between countries, or between residents and non-residents. This phenomenon is an inevitable product of the opening of the capital account.
The New Palgrave Dictionary of Economics defines cross-border capital flows as follows: Cross-border capital flows refer to the movement of capital between different economic regions.
Cross-border capital flows are formed when activities such as the purchase of property ownership and the provision of loans between residents and non-residents of the country are carried out. Cross-border capital flows refer specifically to private cross-border capital flows reflected in the non-reserve financial account in the balance of payments, but do not include officially held reserve assets.
Cross-border capital flows are an important area involving the linkages between a country's financial markets and external economies. When there is a cross-border capital inflow, it means that foreign countries have invested in the country and the country's liabilities to foreign countries have increased;Conversely, when there is a cross-border capital outflow, it means that the country has invested in foreign countries and the domestic assets to foreign countries have increased.
The inflow of cross-border capital flows corresponds to changes in the liability items of the non-reserve financial account, which represents the net occurrence of a country's financial liabilities in a given period, and the investment behavior of non-resident investors plays an important role in this.
Cross-border capital outflow corresponds to the assets of the non-reserve financial account, which is the net acquisition of a country's financial assets, reflecting the investment behavior of resident investors.
Net cross-border capital flows refer to the difference between cross-border capital inflows and cross-border capital outflows, a phenomenon that has attracted the attention of traditional international financial theories. According to this theory, net capital flows are one of the main factors contributing to a country's external vulnerability.
Total flow vs. net flow
Recently, cross-border capital flows have received the attention of many studies. It is important to note that there is a significant difference in nature between total cross-border capital flows and net cross-border capital flows. Net cross-border capital flows only reflect the difference between a country's total external liabilities and total external assets, but it does not fully reflect the country's outward investment and financing model.
Therefore, it is necessary to deepen cross-border capital inflows and outflows** to more accurately reflect a country's outward investment and financing patterns.
Aggregate cross-border capital flows are a better indicator of a country's external vulnerabilities than net capital flows. Total cross-border capital flows are generally larger, more volatile, faster and more pro-cyclical.
According to the Balance of Payments and International Investment Position Manual, cross-border capital flows can be divided into four categories: direct investment, ** investment, financial derivatives and employee stock options, and other investments according to different economic motivations and behavioral patterns.
Direct investments usually involve longer-lasting, long-term relationships, but in some cases they can also be short-term. In addition to the cross-border transfer of funds, cross-border direct investment may also involve technology spillovers and improved management levels.
Cross-border investments refer to cross-border transactions of equity and bonds that are not included in direct investments and reserve assets, and unlike other types of investments, cross-border investments provide a direct route to financial markets with high liquidity and flexibility.
Cross-border investment includes not only transactions between residents and non-residents in the financial markets, but also hedging, private equity, and other transactions. Financial derivatives are relatively small in size and are ignored by many studies.
Other investments refer to the remaining categories of all cross-border investments and financings that are not included in the above three categories of cross-border capital and reserve assets. It mainly includes other equity, currency and deposits, loans, **credit and advances, other receivables and payables, etc. Cross-border capital flows can be divided into short-term capital flows and long-term capital flows according to the length of the term. Although short-term capital flows are generally considered to be more speculative and volatile, there is currently no precise definition of short-term capital flows.
In the early days, short-term capital flows were defined as capital flows with a maturity of less than one year, and capital flows with a maturity of more than one year or without a clear expiration date were recognized as long-term capital flows, and the IMF later abolished this classification criterion. Cross-border capital flows refer to the total cross-border capital flows, including cross-border capital inflows and cross-border capital outflows, and examine the impact of cross-border capital inflows and cross-border capital outflows on financial stability, respectively.
It is of great practical significance to be able to more comprehensively grasp the transmission mechanism of cross-border capital flows in different directions to financial stability in the context of China's continuous expansion of the level of two-way financial opening-up.
Considering the impact of economic development level on the trend and scale of cross-border capital flows, the proportion of liabilities and assets in GDP of non-reserve financial accounts is used as the basis for the calculation and analysis of cross-border capital inflows and cross-border capital outflows. Financial stability encompasses a wide range of topics.
At present, there is no consensus on financial stability in the theoretical and practical circles at home and abroad.
First, different scholars have different understandings of financial stability and summarize the connotation of financial stability. The study of financial stability began with the exploration of financial crisis and financial vulnerability theory, and has received widespread attention due to the frequent occurrence of financial crises in the 90s of the 20th century.
Therefore, some of the literature defines financial stability in terms of its opposite. Beginners focus on describing the states, phenomena and characteristics of financial stability or instability, such as illing and liu, emphasizing that financial institutions, financial markets, and financial infrastructure are in a safe and stable state and are functioning properly.
In order to ensure good coordination between the financial system and the real economy, it can be considered as financial stability, that is, financial stability means the stability of all components of the financial system.
Later studies gradually began to emphasize the normal functioning of the financial system, and Gu Shen et al. defined financial stability as the stable operation and effective functioning of financial institutions and financial markets in the financial system, while the macroeconomic system can maintain stable operation.
The internal law of financial stability
In contrast, the generalization of the functions of the financial system fully reveals the internal law of financial stability, and has strong explanatory power and applicability.
The European Central Bank (ECB) said that financial stability is called a state in which financial institutions, financial markets, and related infrastructure can function effectively, effectively function as savings into investment, and withstand various shocks.
Since the outbreak of financial risks will directly impact the stable operation of the financial system, and there are also literature that consider financial risks when describing financial stability, Wang Jinsong and Ren Yuhang have defined the connotation of financial stability as follows: the main financial risks can be effectively controlled and will not pose a threat to the smooth operation of the elements of the financial system, and will not affect financial institutions.
Financial markets and financial infrastructure function in the allocation of economic resources, and systemic financial risks will not occur. The Financial Stability Law, promulgated in April 2022, clarifies that the goal of maintaining financial stability is to ensure that financial institutions, financial markets, and financial infrastructure continue to play key functions.
Continuously improve the ability of the financial system to resist risks and serve the real economy, prevent individual local risks from evolving into systemic and global risks, and maintain the bottom line of no systemic financial risks. Through the above conceptual combing, it can be seen that in the past, scholars mostly described the connotation of financial stability from the key components of the financial system, such as financial institutions and financial markets.
This is because the stability of the financial system is composed of the stability of key components such as financial institutions and financial markets, and the sound operation of financial institutions and the smooth operation of financial markets are important manifestations of financial stability. Because the definition of financial stability is not yet clear and the analytical framework for financial stability is not yet mature, current research on financial stability focuses more on the components of the financial system.
Focusing on the functioning of key financial institutions and financial markets, and examining financial stability from the various components of the financial system, the research is also more focused and in-depth. Based on the above understanding, we will also start with the key components of the financial system and examine the mechanism of cross-border capital flows on the stability of key components of the financial system.
In addition, it clarifies the impact of cross-border capital flows on financial stability from multiple dimensions. Considering that cross-border borrowing and lending will not only affect the supply and demand relationship in the foreign exchange market through the settlement and sale of foreign exchange, but also disrupt the foreign exchange market, the exchange rate is also one of the core factors affecting cross-border capital flows, and cross-border capital flows are closely related to the foreign exchange market.
At the same time, China's first-class market has formed a multi-level open pattern, and the convenience of foreign investment in the first-class market has gradually improved, but it has also made the first-class market face greater external risk exposure.
Conclusion
Since stability reflects the confidence of market players, the policy authorities are very concerned about stability, and maintaining market stability is of great significance to the stability of the financial system.
In addition, in China, where indirect financing is the mainstay, banks dominate the financial system, and the balance sheet correlation between banking institutions and the close interdependence between banks and other financial markets make the risks of the banking sector more likely to cause systemic risks, so bank stability is the core of financial stability.