Capital Flows, Sterilization, and Macro-Prudential Policy in China

This article estimates the sterilization coefficients of the subcomponents of reserves in China over time with recursive regressions. The results suggest that People’s Bank of China tended to sterilize the more fluctuating components of capital inflows: FDI inflows received little attention, while non-FDI and current account had been heavily sterilized. After including the subcomponents of non-FDI into the empirical model, the results demonstrate that issuing bonds was successful in sterilization intervention till 2007Q2, while the effectiveness of sterilization policies was limited since then, resulting in an increase in monetary supply. The excessive money did not flow into the circulation and had limited effects on stimulating the real economy.