Capital Control, Financial Depth and the Demand of Foreign Reserves: Evidence on 1994-2013 Data in China


We combined foreign reserves, capital control and financial depth with other economic variables in the same model and discussed the factors that affect the demand of China’s foreign reserves. The results showed that 1) a considerable number of foreign reserves are passively accumulated, for instance, stronger capital controls deeper financial system will lower the demand of foreign reserves; 2) the ratio of Hot Money/GDP is more significant than the FDI/GDP as a proxy of foreign reserves’ protective demand.

Share and Cite:

Lu, D. and Liu, Z. (2014) Capital Control, Financial Depth and the Demand of Foreign Reserves: Evidence on 1994-2013 Data in China. Open Journal of Social Sciences, 2, 6-11. doi: 10.4236/jss.2014.29002.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Triffin, R. (1960) Gold and the Dollar Crisis. Yale University Press.
[2] Heller, H.R. (1966) Optimal International Reserves. Economics Journal, 76, 296-311.
[3] Frenkel, J. and Jovanocic, B. (1980) On the Transactions and Precautionary Demand for Money. Quarterly Journal of Economics, 90, 80-95
[4] Calvo, G.A. and Reinhart, C.M. (2002) Fear of Floating. The Quarterly Journal of Economics, 117, 379-408.
[5] Fischer, S. (1999) On the Need for an International Lender of Last Resort. Journal of Economic Perspectives, 13, 85- 104.
[6] Wang, Q.L. (2008) The Empirical Research on Optimal Scale of China’s Foreign Exchange Reserves. Studies of International Finance, 9, 73-79. (in Chinese)
[7] Wang, L.Y. and Wang, K. (2010) Measurement of Optimal Foreign Exchange Reserve in China. Economic Review, 4, 117-123. (in Chinese)
[8] Ren, R.E. and Liu, L.Y. (2004) The Measurement and Analyze on Optimal Scale of China’s Foreign Exchange Reserves. Finance & Trade Economics, 5, 61-68. (in Chinese)
[9] Huang, J. (2002) The Dynamic Measurement on the Demand of Foreign Exchange Reserves. World Economic Forum, 6, 62-69. (in Chinese)
[10] Lu, J. and Luo, W.Q. (2010) The Measurement and Analyze on Monthly Hot Money. Statistics and Decision, 19, 85- 89. (in Chinese)
[11] Furman, J. and Stiglitz, J. (1998) Economic Crises: Evidence and Insights from East, Asia. Brookings Papers on Economic Activity, 2, 1-114.
[12] Radelet, S. and Sachs, J. (1998) The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Brookings Papers on Economic Activity, 1, 1-74.
[13] Bird, G. and Rajan, R. (2003) Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises. The World Economy, 26, 873-891.
[14] De Beaufort Wijnholds, J.A.H. and Kapteyn, A. (2001) Reserve Adequacy in Emerging Market Economies. Working Paper No. 01/43, IMF.
[15] Liu, L.Y. (2008) Did Hot Money Promote the Stock Market and Real Estate Market? Journal of Financial Research, 10, 48-70. (in Chinese)
[16] Sheng, L.G. and Zhao, H.Y. (2007) Yields and Currency Composition of Foreign Reserves and Hot Money in China. China Economic Quarterly, 6, 1255-1276. (in Chinese)
[17] Wang, S.H. and He, F. (2007) China’s Short-Term International Capital Flows: Status, Pathways and Factors. The Journal of World Economy, 7, 12-19. (in Chinese)
[18] Bai, X.Y. and Wang, P.J. (2008) The Effectiveness of Capital Control and Reform of Exchange Rate Regimes in China. Journal of Quantitative & Technical Economics, 9, 65-75. (in Chinese)
[19] McKinnon, R.I. (1989) Finance and Economic Development. Oxford Review of Economic Policy, Vol. 5, No. 1.
[20] Li, S.K. (2006) Foreign Exchange Reserves VS External Debt. Economic Herald, 10, 79-81. (in Chinese)
[21] Lin, Y.F., Zhang, Q. and Liu, M.X. (2003) Financial Structure and Economic Growth. The Journal of World Economy, 1, 3-21. (in Chinese)
[22] Edwards, S. (1996) Exchange Rates and the Political Economy of Macroeconomic Discipline. American Economic Review, 86, 159-163.
[23] Johansen, S. (1988) Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control, 12, 231-254.

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.