A model of Chinese capital account liberalization

Dong He, Sheung Kan LUK*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    5 Citations (Scopus)


    We provide a theory-based inquiry into the contours of China's international balance sheets after the renminbi becomes convertible under the capital account. We construct a two-country general equilibrium model with trading in equities and bonds and calibrate the model with U.S. and Chinese data. We interpret Chinese capital account liberalization as a removal of restrictions that prohibit agents trading Chinese bonds and U.S. equities. We explore how international risk-sharing can be achieved through portfolio diversification in each of these asset market configurations. We also look at how these holdings would change as China gradually rebalanced its production with a larger share of labor income, and as the productivity gap between China and the United States narrowed. We find that both U.S. and Chinese residents would have incentives to increase their holdings in each other's equities and to issue debt in each other's currency.

    Original languageEnglish
    Pages (from-to)1902-1934
    Number of pages33
    JournalMacroeconomic Dynamics
    Issue number8
    Publication statusPublished - 1 Dec 2017

    Scopus Subject Areas

    • Economics and Econometrics

    User-Defined Keywords

    • Capital account liberalization
    • China
    • Country portfolios
    • Renminbi internationalization


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