The Impact of Short-term Capital Flows on Systemic Financial Risk in China

Abstract

With the continuous improvement of China's level of opening up, the expansion of the scope and depth of openness, and the promotion of two-way openness of the financial market, short-term capital flows in both directions have become more active, which also poses challenges to the stability of the Chinese financial system. This paper selects 45 listed financial institutions in China from January 2011 to July 2023 as research samples. By constructing a dynamic CoVaR model to measure the systemic financial risk in China, and then introducing the TVP-VAR model to explore the time-varying relationship between short-term capital inflow and systemic financial risk. The research results show that the impact of short-term capital inflow on China's systemic financial risk exhibits time-varying characteristics, specifically characterized by intense short-term effects and weakened long-term effects. This research provides empirical evidence for regulatory authorities, which is conducive to formulating more effective macro-prudential policies. At the same time, it provides a reference for financial institutions' risk management, helping them better cope with market fluctuations and maintain the stability of themselves and the entire financial system.