CoPS/IMPACT Working Paper Number G-251

Title: The implications for trade and FDI flows from liberalisation of China's capital account

Author: George Verikios


We model the partial liberalisation of the capital account by China using a dynamic CGE model of the world economy. Our results indicate that a reduced capital controls on FDI would lead to a significant increase in FDI capital in China and a significant reduction in the cost of capital in China relative to the rest of the world. Further, we observe an increase in capital stocks in all regions, which benefits all regions in terms of GDP and GNP. The economies of China (1.7%), East Asia (1.3%) and Australia/New Zealand (0.5%) grow most strongly. The rental price of capital falls significantly in these regions, which lowers domestic costs and they experience a real depreciation of the exchange rate and thus increased exports relative to other regions. We also observe an across-the-board increase in the saving rate driven by the rise in the price of consumption relative to investment (saving) in all regions.

JEL classification: C68, E22, F21, F23, F38, F40.

Keywords: capital controls, China, computable general equilibrium, FDI, multinational firms, trade.

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