China's Capital Controls and Interest Rate Parity: Experience during 1999 - 2010 and Future Agenda for Reforms

Abstract

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.