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A MODEL OF CHINESE CAPITAL ACCOUNT LIBERALIZATION

Published online by Cambridge University Press:  12 April 2016

Dong He  and
Paul Luk
Dong He
Affiliation:
International Monetary Fund
Paul Luk*
Affiliation:
Hong Kong Baptist University
*
Address correspondence to: Paul Luk, Department of Economics, Hong Kong Baptist University, WLB 530, the Wing Lung Bank Building for Business Studies, 34 Renfrew Road, Kowloon Tong, Kowloon, Hong Kong, China; e-mail: [email protected].
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Abstract

We provide a theory-based inquiry into the contours of China's international balance sheets after the renminbi becomes convertible under the capital account. We construct a two-country general equilibrium model with trading in equities and bonds and calibrate the model with U.S. and Chinese data. We interpret Chinese capital account liberalization as a removal of restrictions that prohibit agents trading Chinese bonds and U.S. equities. We explore how international risk-sharing can be achieved through portfolio diversification in each of these asset market configurations. We also look at how these holdings would change as China gradually rebalanced its production with a larger share of labor income, and as the productivity gap between China and the United States narrowed. We find that both U.S. and Chinese residents would have incentives to increase their holdings in each other's equities and to issue debt in each other's currency.

Keywords

ChinaCountry PortfoliosCapital Account LiberalizationRenminbi Internationalization
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 8 , December 2017 , pp. 1902 - 1934
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

The authors thank an anonymous referee for helpful comments and advice. We also thank Philippe Bacchetta, David Cook, Pierre-Olivier Gourinchas, Anton Korinek, Matteo Maggiori, Robert McCauley, Helene Rey, Cedric Tille, David Vines, Tommy Wu, Danyang Xie, Juanyi Xu, James Yetman, Wenlang Zhang, Huanhuan Zheng, and the participants at the International Conference on Capital Flows and Safe Assets at Fudan University and at the HKIMR/HKUST Joint Conference on Macroeconomics and International Finance for their helpful discussions. We are grateful to Maggie Fok for her excellent research assistance with the working paper. All errors are our own. Both authors were staff members of the Hong Kong Monetary Authority when preparing the working paper. The views expressed in the paper are those of the authors only, and not necessarily those of the International Monetary Fund or the Hong Kong Monetary Authority.

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