Capital Controls and Interest Rate Parity: Evidences from China, 1999-2004

This paper shows that deviations estimated from the uncovered interest rate parity

condition present strong unstationarity and persistency, thusindicating China’s capital

controls is still effective in driving a wedge between onshore and offshore returns.

Similar results are also obtained from covered interest rate parity condition. Our findings

also demonstrate that there is no evidence ofmoney market integration with Hong Kong.

However, the deviation also shows signs ofmoderation over time because of increased

pace of capital account liberalization.