The macro-prudential management of cross-border capital flows is aimed at counter-cyclical adjustment of cross-border capital flows, so as to achieve the purpose of maintaining financial stability.
In times of cross-border capital surge or flight, policy authorities tend to tighten macroprudential policies;When the inflow of foreign capital is weak and cannot provide sufficient capital and liquidity for domestic production activities, the policy authorities will relax macro-prudential supervision to enrich the cross-border capital of enterprises and financial institutions**.
The degree of tightening of macro-prudential management of cross-border capital flows has been adjusted several times
In recent years, the PBOC has repeatedly adjusted the degree of tightness in macro-prudential management of cross-border capital flows to promote balance-of-payments equilibrium, so it is necessary to discuss the effectiveness of policy tightening and easing separately.
Since the implementation of the macro-prudential policy on cross-border capital flows is aimed at regulating cross-border capital flows and keeping the RMB exchange rate basically stable, the PBOC will also introduce macro-prudential measures for cross-border capital flows when cross-border capital flows fluctuate greatly, or when the exchange rate appreciates or depreciates sharply.
Therefore, in the Qualvar model, we introduce the target variables of cross-border capital inflow, cross-border capital outflow and exchange rate change, and together with the policy implementation variables, to form a VAR system, so as to estimate the continuous potential policy implementation propensity series.
First, the latent variables of macroprudential policy on cross-border capital flows are consistent with binary variables, and when macroprudential policies are relaxed or tightened, the latent variables will immediately jump sharply, and the latent variables are positive only during the period of policy change, and negative in other periods, which is consistent with the results of the existing literature.
Second, the fluctuation range of the latent variables of macroprudential easing and tightening is small across the sample range, except for the period of policy change.
Third, the number of macroprudential policy tightening in China's cross-border capital flows is significantly greater than the number of policy easing, and the macroprudential policy easing only occurred after 2014, and the number of policy tightening after 2014 was also greater than before 2014.
Fourth, from the perspective of operation time, after the international financial crisis in 2008, due to the rapid domestic economy, cross-border capital also flowed to the domestic market, in order to prevent economic overheating, reduce the pro-cyclical nature of cross-border capital, the central bank in 2010-2011 twice tightened macro-prudential policy.
In the second half of 2015, China's "stock market crash" incident directly led to a negative spiral mechanism of capital outflow and RMB depreciation, after which the People's Bank of China (PBoC) imposed interest-free foreign exchange risk reserves on forward foreign exchange sales, and expanded the scope of collection several times to alleviate the withdrawal of foreign capital and domestic capital outflows, and proposed a countercyclical factor for the first time in 2017 to further stabilize the foreign exchange market.
Under the effect of the above-mentioned series of measures, China's cross-border capital flows have stabilized, the stability of the foreign exchange market has gradually recovered, and a number of prudential policies have gradually been withdrawn.
Since 2020, the new crown pneumonia epidemic has changed the direction of the world economy, due to the good recovery of China's economy, the monetary policy remains stable, driven by economic fundamentals, the RMB exchange rate appreciated sharply in 2020.
In order to prevent the sharp inflow of cross-border capital from leading to excessive appreciation of the renminbi, the People's Bank of China (PBoC) lowered the foreign exchange risk reserve ratio and the macro-prudential adjustment parameters for cross-border financing of financial institutions in the second half of 2020.
As the inflation problem in foreign countries intensifies, the Federal Reserve's aggressive interest rate hike has triggered global capital to return to the United States, and China's cross-border capital has continued to outflow, and the corresponding foreign exchange market has also been greatly impacted.
In order to further stabilize the foreign exchange market and improve the ability of financial institutions to use foreign exchange funds, the People's Bank of China (PBoC) lowered the foreign exchange reserve ratio in May 2022.
In conclusion, the latent variables obtained by the qualvar model well reflect the implementation of macroprudential policies for cross-border capital flows.
As for the variables of cross-border capital flows, consistent with the previous article, the liabilities and assets of the non-reserve financial account in the balance of payments are still used as the top variables for cross-border capital inflows and outflows, respectively.
Extreme cross-border capital flows have had a negative impact
As extreme cross-border capital flows will have a greater negative impact on a country's financial stability, more and more literature has begun to pay attention to extreme cross-border capital flows, and while examining the effectiveness of macro-prudential policies and capital controls on cross-border capital flows, the regulatory effects of these two types of policies on extreme capital flows will be further examined.
Referring to the existing literature, extreme capital flows can be divided into four categories, namely surge, emergency stop, flight and withdrawal, which in turn indicate a sharp increase and a sharp decrease in inflows, and a sharp increase and decline in cross-border capital outflows. According to the practice of Forbes and Waston, the extreme capital flow series in China is constructed, because the extreme capital flow series is also a binary variable.
The qualvar model is also used to construct the continuous latent variables of the extreme capital flow sequence. In addition to macroprudential policies on cross-border capital flows, the effectiveness of capital controls will also be tested. The measurement indicators of capital control in existing studies can be roughly divided into two categories: the regulatory level and the factual level.
The de facto sequence of capital controls, based on specific measures of capital controls, such as Fernández, is used, and the database distinguishes between controls on cross-border capital inflows and outflows, which are updated regularly. Since the capital control sequence is also a binary variable, it is treated in the same way as macroprudential policy.
Successive sequences of deregulation and tightening of capital inflows and deregulation and tightening of capital outflows are obtained. In addition to macro-prudential policy and capital control variables, other variables that can affect cross-border capital flows will be controlled, and according to the existing literature, the driving factors, pull factors, and regional contagion factors are comprehensively selected.
There are five categories of macroprudential policies for the domestic sector and spillover factors for foreign policies. Regarding the driving factors, referring to the existing literature and related classical theories, we selected: investor sentiment. Taking the CBOE VIX index as the most variable of investor sentiment, this indicator can be a good indicator of investors' risk aversion.
and is identified as a key driver of cross-border capital flows. U.S. monetary policy. Due to the unique position of the US dollar in the international currency, the US monetary policy determines the level of global liquidity, so it is also one of the important determinants of China's cross-border capital flows.
Many literatures use the U.S. shadow interest rate as the variable for U.S. monetary policy to overcome the zero interest rate floor problem, but because of the lag in the update of this variable, the federal interest rate is used as the variable for U.S. monetary policy.
Global economic growth is a key driver of cross-border capital flows, and global GDP growth is the most important variable for global economic growth.
Regarding the pulling factors, the choice is: economic growth, the economic growth level of a country can not only fully reflect the economic fundamentals, but also reflect the return on investment of the country as a whole, with the growth rate of China's GDP to depict the economic growth level, the price level, and the CPI month-on-year to depict the domestic price trend. Economic policy uncertainty.
In general, domestic economic policy uncertainty is inversely proportional to the level of cross-border capital flows. When the uncertainty of domestic economic policy is high, it means that the economic prospect of the country is unclear, and the corresponding foreign capital will reduce the inflow.
Exchange rate factors, exchange rate fluctuations are one of the most important drivers of cross-border capital flows. The first-order difference of the central parity of the RMB exchange rate against the US dollar is used to represent the change of the exchange rate, and with regard to regional contagion factors, regional contagion factors can explain a large proportion of the fluctuation of China's cross-border capital flows. Therefore, in addition to the traditional driving and pulling factors, it is also necessary to pay attention to the impact of regional contagion factors on cross-border capital flows, and take the common factors of Asian regions obtained above as the first variable of regional contagion factors.
Implement macro-prudential policies for domestic purposes
A country's implementation of domestically targeted macroprudential policies may have unintended implications for cross-border capital flows, for example, when a country wants to adopt macroprudential policies to raise domestic financing costs, some firms will choose cross-border financing to circumvent regulation.
The phenomenon of obtaining financing in the host country through its overseas subsidiaries and transferring it to the parent company in the home country, at this time, non-financial enterprises play the role of financial intermediaries, which has attracted the attention of many scholars;At the same time, domestic banks can also provide loans to overseas enterprises through their overseas branches.
Therefore, macroprudential policies targeting the domestic sector will also have a "leakage effect" effect on cross-border capital flows, which in turn will hinder accurate judgment of the effectiveness of relevant policies, so it is necessary to control this part of the impact.
Based on the IMAPP database, the macro-prudential policy instruments related to cross-border capital flows are excluded, and all other remaining instruments are summed to obtain the macro-prudential policy sequence for the domestic sector, so as to reflect the degree of tightness and change of domestic macro-prudential policies. In addition, there are spillover effects in policies to manage cross-border capital flows between countries.
Macroprudential policies and capital controls imposed by other countries on cross-border capital flows for the purpose of maintaining financial stability can have a "beggar-thy-neighbor" effect, which will not only impact the financial system of the receiving country, but also constrain the policy effectiveness of other countries.
Gori et al. pointed out that when a country tightens the management of cross-border capital flows, international investors will reduce their investment in the country and invest in other countries with similar returns to the country, which will increase cross-border capital inflows from other countries, impact the financial systems of other countries, and affect the policy effectiveness of other countries.
Therefore, it is necessary to consider the policy spillovers of other countries when examining the effectiveness of relevant policies.
With reference to Pasricha et al., other BRICS countries other than China were selected as countries with high similarity to China's investment returns, and these countries are similar to China's emerging economies with large economies.
Over the past few decades, the BRICS countries have maintained a high growth rate, attracting a large amount of international capital, and in order to maintain domestic financial stability, the BRICS countries have often used macroprudential policies and capital controls to regulate cross-border capital flows.
Therefore, it is appropriate to choose these countries. The macro-prudential policy and capital control variables of cross-border capital flows in BRICS countries are processed in the previous way to obtain continuous policy variables, and then the policy spillover variables faced by China are obtained by GDP weighting, and they are controlled as control variables in the empirical evidence below.
China has repeatedly used macro-prudential policies specifically for cross-border capital flows to regulate cross-border capital flows, so as to curb the pro-cyclical fluctuations of cross-border capital flows, so as to achieve the purpose of resolving cross-border capital flow risks and maintaining financial stability, and the effectiveness of China's macro-prudential policies for cross-border capital flows will be quantitatively analyzed. The tightening of macro-prudential policy has a greater restrictive effect on capital inflow than the promotion of macro-prudential relaxation, which also reflects the asymmetry of policy effects.
In the face of the impact of the macro-prudential policy of one unit deviation, the impulse response results of cross-border capital outflow show that when the scale of cross-border capital outflow is to be restricted, the tightening of macro-prudential policy cannot immediately achieve the policy goal, and the policy implementation has not produced significant results in the early stage, and it is difficult to limit the scale of capital outflow.
This shows that when regulating cross-border capital outflows, the tightening of macro-prudential policies has a certain time lag, but it has a long duration. Therefore, if the policy authorities want to limit the scale of capital outflows by tightening macroprudential policies, they need to consider the time lag of the policy effect.
Compared with the easing of macroprudential policy, the impact of tightening policy is more intense and longer-lasting, but the response to policy easing is faster.
Therefore, the differences in the effects of different policy directions should be fully considered before the implementation of the policy. Whether it is tightening or easing macro-prudential policies, it can effectively affect the scale of cross-border capital flows.
Conclusion
From the perspective of the direction of impact, the tightening macro-prudential policy can effectively limit the scale of cross-border capital flow, while the loose macro-prudential policy can effectively promote the two-way cross-border capital flowJudging by the intensity of the impact.
Capital outflows respond more to tightening and easing macroprudential policies than capital inflowsFinally, in terms of the duration of the impact, the duration of policy tightening is greater than the duration of policy easing, both for capital inflows and outflows.