Management of Short-term Capital Flows in China

Abstract: Our essay focuses on short-term capital inflows and their effects on China’s economy.The reason for this work was the increasing vulnerability of China’s economy and the risk of newupcoming world financial crisis, all because of uncontrollable amounts of speculative capitalflows. Because of this problem, we raised a main question that we try to answer in this essayhowto reduce the possibility and the severity of the future financial crisis in China? In order tosolve this problem, first we searched for the existing theory of capital flows, mainly short-termcapital inflows. We analysed why investors choose capital flows and some specific countries,why it is profitable, but also risky and what could be done by countries, to stop these inflows orat least to diminish their effect on domestic markets. After that, we looked for past experiencesof countries faced with surges of capital flows and their measures for controlling them, weanalysed, if the theoretical tools were actually effective in reality. To finish the model, weapplied these measures to China’s economy and gave our viewpoint on what could be changedin order to avoid the dangers of short-term capital inflows. Last, we sum up the whole essay andsuggest the best mix of measures that China could use to control capital inflows as well as theireffects on the economy.