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China, Asia, and the New World Economy$
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Barry Eichengreen, Yung Chul Park, and Charles Wyplosz

Print publication date: 2008

Print ISBN-13: 9780199235889

Published to Oxford Scholarship Online: May 2008

DOI: 10.1093/acprof:oso/9780199235889.001.0001

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The Chinese Approach to Capital Inflows: Patterns and Possible Explanations

The Chinese Approach to Capital Inflows: Patterns and Possible Explanations

(p.274) 11 The Chinese Approach to Capital Inflows: Patterns and Possible Explanations
China, Asia, and the New World Economy

Eswar Prasad

Shang‐Jin Wei

Oxford University Press

This chapter examines the determinants and nature of China's capital inflows. Section 11.2 presents a detailed picture of the evolution of China's capital inflows. Section 11.3 examines the evolution of the balance of payments and dissects the recent surge in the pace of accumulation of international reserves. Section 11.4 discusses the broader composition of China's capital inflows in the context of the burgeoning literature on financial globalization. Section 11.5 examines various hypotheses that have been put forward to explain why China has its inflows so heavily tilted toward foreign direct investment (FDI). In this context, a detailed description of China's capital account restrictions and how these have evolved over time are provided. While controls on non-FDI inflows as well as tax and other incentives appear to be proximate factors for explaining the FDI-heavy composition of inflows, other factors may also have contributed to this outcome. It is not straightforward to disentangle the quantitative relevance of alternative hypotheses. It is argued that at least a few of the hypotheses — including some mercantilist-type arguments that have been advanced recently — are not consistent with the facts.

Keywords:   China, capital inflows, capital accounts, foreign direct investment, balance of payments

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