Capital Controls and Interest Rate Parity: Evidences from China, 1999-2004 ∗

Abstract

This paper shows that deviations estimated from the uncovered interest rate parity condition present strong unstationarity and persistency, thus indicating China’s capital controls is still effective in driving a wedge between onshore and offshore returns. Similar results are also obtained from covered interest rate parity condition. Our findings also demonstrate that there is no evidence of money market integration with Hong Kong. However, the deviation also shows signs of moderation over time because of increased pace of capital account liberalization.