The impact of the global financial cycle on China's cross-border capital flows

Hui An, Yang Huang, Lifu Fan, Hao Wang and Xuan He

China Economic Review, 2025, vol. 91, issue C

Abstract: From the global financial cycle (GFC) perspective, this paper investigates the influence of global financial co-movement, triggered by changes of monetary policy in core countries, on China's cross-border capital flows. The study first constructs a mechanism framework to understand how the GFC affects cross-border capital flows within the push-pull framework. Using quarterly data from G7 and BRICs countries spanning 2006 to 2023, this paper builds a dynamic factor model based on Rey's classical GFC theoretical framework to measure the GFC and describes its characteristics across five stages, in conjunction with shift of monetary policy in core countries. Then, the analysis applies the MSVAR model to examine the nonlinear impact of the GFC on China's total cross-border capital flows, total capital inflows, and outflows. Furthermore, the study explores the heterogeneity of the impacts on direct investment, portfolio investment, and other investment. The results indicate that changes of monetary policy in core countries contribute to the formation of the GFC. When conventional monetary policy shifts to unconventional policy, the GFC enters an expansion period; conversely, when it reverts to conventional policy, the GFC enters a contraction period. Overall, the GFC positively affects China's total capital flows, with greater impact during expansion periods than contraction periods. The effect on total capital outflow surpasses that on total capital inflows. Furthermore, direct and portfolio investments demonstrate lower sensitivity to the GFC, whereas other investments, primarily consisting of cross-border bank loans, exhibit a pronounced pro-cyclical pattern with the GFC.

Keywords: Global financial cycle; Cross-border capital flows; Monetary policy; Push-pull framework (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1043951X25000367
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:91:y:2025:i:c:s1043951x25000367

DOI: 10.1016/j.chieco.2025.102378

Access Statistics for this article

China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

More articles in China Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().