The Analysis Model of Global Flow of Funds in

Theory and Practice

Nan Zhang 　

Hiroshima Shudo University

International Statistics Forum 2006, (Beijing, J une 2006)

Contents

• A doubtful recycling in global flow of funds

• Model building

• Overseas flow of funds in China

• The conclusion of the analysis

Source: Flow of Funds Accounts of the United States , March 2006

- 1000

- 500

0

500

1000

1500

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5

External flow of funds in U.S. (US$ billions)

InflowsOutfliwsCurrent account

- 3

- 2

- 1

0

1

2

3

4

5

76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4

Developing countries continue to export capital (% of GDP)

Developing countriesLow- income countries

Source: World Bank. Global Development Finance 2005

Overseas fund flow is increasing in China (100 million RMB)

- 20000

- 15000

- 10000

- 5000

0

5000

10000

15000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

FIFO

Source: The People’s Bank of China Quarterly Statistical Bulletin

The survey of research literature

• H.Chenery & M.Strout,1966 (Two-Gap model)

• Mundell-Fleming model, 1968

• K. Marwah & L. R. Klein model,1983

• 石田定夫 ,1993 （『日本経済の資金循環』）

• 桜川 ,2002 （「国際移動の動学モデル」）• 渋谷浩 ,2003( 「経済発展と資本逃避」 )

What is global flow of funds?• 石田 (1993) pp.170-171 national flow of funds → global flow of funds international capital movements → global flow of funds

• 山本 (2002) p39 各国の経常収支不均衡がどのよう国際資本移動によってファイナン

スされているかを表したものであり、また国際資本取引における各国の相互依存関係の特徴を単純化したものである。

• 張 (2005) ｐ 32　　　国内の貯蓄投資バランスと資金過不足に結び付けて、経常収支

不均衡をファイナンスするなどの対外金融資産調達と運用のために引起された国際資金の流れであり、また国内と国際の面から経常収支と資本収支における各国の相互依存関係の特徴を表したものである。

The theoretical outline of analysis

• Savings-investment and current account balance

• The financial markets balance

• Net fund outflows

LAIMEXIS )(

FRAFIFOFOFI oodd

CAAOIPIDIFIFO oo )(

Theoretical model

S t r u c t u r a l e q u a t i o n s :

① tttt RbYbbYS 1311211/

② ttt RbKbYbbI 241232221 2

③ ttt YbCPIbbIM 333231

④ ttt YbREERbbEX 434241

⑤ tttttt DbFDIbREERbPERbYbbFI 5655545315251

⑥ tttt FIbREERbYRbbFDI 646316261

⑦ ttUStt RbriskbrbondbbOPI 74737271

⑧ tttt RbCAbRFLbbOIO 848318281

Theoretical model

⑨ tttt riskbYRbRbbPER 941939291

⑩ ttt

tt FObRCBb

GDPV

MbbR 104103102101 ln

⑪ tttt EXbSRbREERbbREX 114113112111

⑫ ttt FIbCAbbFRA 123122121

⑬ tttttt DbFFRbCFbPIbFRAbbFO 136135134133132131

Identities

⑭ ttt FIFONFI

⑮ ttt EXIMCA

⑯ ttttt GICNFIY

The method of model building• 　　　　　　　　　• Identification Estimation Evaluation 　　　 Prediction

• Three Stage Least Squares method: 3SLS

BPLMIS BPFFIS

Data: 　　　　　　　　

• Flow of Funds Account, FOF;• Balance of Payments, BOP; • International Financial Statistics, IFS ;• World Economic Outlook, WEC;• Bank for International Settlements, BIS;　　　（ Quarterly Locational International Banking Statistic

s ） 　　　（ Semi-annual Consolidated International Banking Statistics ） • Global Development Finance, GDF ;• The Institute of International Finance, IIF; • Treasury International Capital, TIC);

Overseas flow of funds in China (100 million RMB)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Inflows (A) 1,667 2,929 5,326 5,654 5,901 5,005 2,976 3,808 4,877 3,488 4,236 5,807 8712Outflows (B) 1,681 1,604 2,514 2,427 2,588 3,109 3,431 3,041 4,643 557 1,464 1,224 - 551Net inflows (A-B) -14 1,325 2,811 3,228 3,313 1,896 -454 767 234 2,931 2,772 4,583 9263

FRA (C) 117 -102 -2,631 -1,877 -2,632 -2,961 -532 -704 -873 -3,917 -6,250 - 9,686 - 17080Errors & O. (D) -456 -565 -832 -1,487 -1,294 -1,405 -1,372 -1,361 -1,056 -450 550 1,377 2135NFI (E) -353 658 -652 -137 -612 -2,471 -2,359 -1,298 -1,696 -1,436 -2,928 - 3,726 - 5682Note: A- B)+C+D=E（ Source: The People’s Bank of China Quarterly Statistical Bulletin

The characteristics of overseas fund flows in China, 1992 – 2004: (100 million RMB)

• Balance of savings-investment : 1,194• Current-account: 1,755• Overseas capital inflow: 4,645• Domestic capital outflow: 2,133• Foreign reserve assets: -3,779• Capital flight : - 478• Net capital inflows 2,512 – FER3,779 – Capital flight478

　＝ -1,745 （ continue to export capital per annum ）

A doubtful recycling in China

• The constitution of foreign reserve assets

CA=1755, FRA=3779

• The matter of financial control system

• The risk of the fund flows

0

100

200

300

400

500

600

700

800

900

99 0 1 2 3 4 5 6

Leading to record levels of reserves in China (US$ billionds)

U.S.Transactions with Foreigners in Long- Term Securites by China(US$million)

0

5000

10000

15000

20000

25000

30000

35000

40000

Treasury Bonds & Notes

Gov't Agency Bonds

Corp. Bonds

Corp. Stocks

Foreign Bonds

Foreign Stocks

Source: http://www.ustreas.gov/tic/

Source: World Bank. Global Development Finance 2005

Many countries have appreciated against the dollar (%)2002.1 2005.1～

- 100

- 80

- 60

- 40

- 20

0

20

40

60

80

100

The SYSLIN Procedure

Three-Stage Least Squares Estimation

Model SAEVING

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 0.043753 0.037190 1.18 0.2732

Y1 1 1.646E-6 2.023E-7 8.14 0.0001

R 1 0.026773 0.002723 9.83 0.0001

Model INVEST

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 -34615.2 5027.563 -6.89 0.0002

Y2 1 0.478428 0.092649 5.16 0.0013

K1 1 0.885860 0.045474 19.48 0.0001

R 1 1697.219 366.1342 4.64 0.0024

Model IMPORT

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 -9531.44 997.3921 -9.56 0.0001

CPI 1 69.73398 8.722656 7.99 0.0001

Y 1 0.048123 0.002109 22.82 0.0001

Model EXPORT

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 1832.190 436.1712 4.20 0.0030

REER 1 -41.2018 5.364421 -7.68 0.0001

Y 1 0.048414 0.001778 27.23 0.0001

Model INFLOWS

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 9086.756 2699.549 3.37 0.0200

Y1 1 0.056308 0.012775 4.41 0.0070

PER 1 -3.10092 2.634085 -1.18 0.2921

REER 1 -216.366 31.97071 -6.77 0.0011

FDI 1 3.374798 0.574282 5.88 0.0020

D 1 -1186.51 465.4234 -2.55 0.0513

Model FDI

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 -3949.20 408.5017 -9.67 0.0001

YR1 1 139.0042 8.021643 17.33 0.0001

FI 1 0.140958 0.007698 18.31 0.0001

REER 1 57.91918 3.587181 16.15 0.0001

Model RATES

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 8.626042 1.238897 6.96 0.0002

MR 1 -10.1647 2.123998 -4.79 0.0020

RCB 1 0.156941 0.125606 1.25 0.2516

FO 1 0.000077 0.000032 2.43 0.0453

Model EXCHANGE

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 8.833047 0.076984 114.74 0.0001

REER 1 -0.00502 0.000583 -8.61 0.0001

SR 1 -0.13278 0.115058 -1.15 0.2864

EX 1 -2.73E-6 3.957E-6 -0.69 0.512

Model RESERVE

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 4151.362 699.1684 5.94 0.0003

CA 1 -7.87594 1.710688 -4.60 0.0017

FI 1 -1.44173 0.175694 -8.21 0.0001

Model OUTFLOWS

Parameter Standard

Variable DF Estimate Error t Value Pr > |t|

Intercept 1 2210.028 668.6175 3.31 0.0213

FRA 1 -0.50888 0.089714 -5.67 0.0024

PI 1 0.047163 0.033330 1.42 0.2162

CF 1 2.256186 0.563783 4.00 0.0103

FFR 1 854.2071 180.3776 4.74 0.0052

D 1 1043.989 362.2353 2.88 0.0345

The shock of increase in FRA

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

FRAPFRA

Growth rate of CA 5% (from 2005 to 2010)

Growth rate of FI 8%

Federal funds rate 1.46 → 2.14

REX 8.028 → 6.894

The conclusion of the analysis

• Balance of savings-investment ：

• Current-account:

• International 　 capital inflows:

• Net outflows from china: Foreign reserve assets; Capital flight

• The influence of the American factor

Thank You !Thank You ! To Comment or obtain a copy of full paper:To Comment or obtain a copy of full paper:

zhang@shudo-u.ac.jpzhang@shudo-u.ac.jp