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China's Capital Controls and Interest Rate Parity

:Experience during 1999 - 2010 and Future Agenda for Reforms

August 2011
Ichiro Otani*1
Tomoyuki Fukumoto*2
Yosuke Tsuyuguchi*3


This paper reviews the evolution of China's capital controls over the past decade, estimates their strength, assesses their effectiveness in influencing capital flows at a macro level, and draws policy implications for the financial market reforms in the coming years. While capital controls drove a wedge between the domestic market and the market abroad, capital flows in both directions have been rapidly increasing. This implies that, in order to deal with increasing volume of capital flows in the coming years, it is important for the authorities to keep improving the infrastructure for monitoring and assessing capital flows.

Capital controls, Interest Rate Parity, Financial Market Reform

JEL classification
F31, F36

Views expressed here are those of the author and do not necessarily reflect the official views of the Bank of Japan. We thank Takeshi Kimura and Kenichiro Watanabe for their useful comments during the workshop held at the Bank of Japan in September 2010. Thanks are also due to Roberto Piazza of the IMF and Yoshiaki Azuma of the Bank of Japan for their useful comments.

  1. *1Economic Policy Consultant, Potomac, MD
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  2. *2International Department, Bank of Japan.
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  3. *3Shinkin Central Bank (Bank of Japan when the paper was drafted)
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