Working Paper: CEPR ID: DP5852
Authors: Philip R. Lane; Sergio L. Schmukler
Abstract: Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China?s FDI liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are ?short equity, long debt.? Third, China and India have improved their net external positions over the last decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies; domestic financial sector policies; and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset/liability holdings) and, consequently, the international financial system.
Keywords: Capital flows; China; Financial integration; India; World economy
JEL Codes: F02; F30; F31; F32; F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic financial developments and policies (O23) | International financial integration (F30) |
| Financial liberalization and exchange rate policies (F33) | Capital flows (F32) |
| Capital flows (F32) | Asset-liability holdings (G32) |
| Domestic financial reform (G28) | Net foreign asset positions (F21) |
| Financial policies (G38) | Asymmetry in international balance sheets (F30) |
| Accumulation of reserves (E22) | Protection against international financial crises (F65) |