The research on the impact of short-term cross-border capital flows on stock market prices in China

Yuantao Fang (), Renhong Wu (), Md Alamgir Hossain () and Aocheng Wu ()

The Economics and Finance Letters, 2024, vol. 11, issue 4, 289-303

Abstract: This paper examines the long-term dynamic impact of short-term cross-border capital flows on the Shanghai Composite Index and the CSI 300 Index using monthly data from 2010 to 2020 and a Vector Autoregression (VAR) model. With the financial opening and the internationalization of the renminbi in China, the stock market has gradually liberalized its management of foreign capital. As a result, the A-share market has become a target for passive capital inflows from overseas investors. This has further intensified the volatility of asset prices and posed challenges to China's cross-border capital regulation. According to the study, short-term cross-border capital flows have a negligible impact. However, a positive correlation appears between 4 to 9 months, followed by a significant negative impact in the 10th month, reflecting the oscillatory risks that cross-border capital flows pose to China's stock prices. This finding reflects how Chinese capital controls have limited the short-term negative impact of cross-border capital flight on stock prices. The paper recommends strengthening the regulation of short-term cross-border capital, cautiously advancing the financial opening system, and actively improving the stock market system.

Keywords: Impulse response analysis; Short-term cross-border capital; Stock indexes; VAR model. (search for similar items in EconPapers)
Date: 2024
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