Xiao Zhengyan, Chen Kan, Zhou Xinrui
Studies of International Finance. 2025, 0(7): 3-14.
The increasing openness of China's capital account has amplified the dual volatility of cross-border capital flows, necessitating effective regulatory tools to mitigate systemic risks. Capital Flow Management Measures（CFMs）, as critical policy instruments, have played a pivotal role in stabilizing capital flows. However, their effectiveness faces challenges from international media sentiment against the background of high-level opening up, which shapes investor expectations and capital flow dynamics. Existing literature has largely focused on external shocks or global financial cycle, overlooking the role of international media sentiment. This study fills that gap by investigating how international media sentiment influences the efficacy of China's CFMs and explores policy coordination and policy communication strategies to enhance regulatory outcomes.
Utilizing a comprehensive dataset from RavenPack, this research constructs an international media sentiment index focused on“China's economy”by aggregating Event Sentiment Scores（ESS）from global media outlets. The Local Projection（LP）method and threshold-augmented mixed-frequency FAVAR models are employed to analyze the dynamic interactions between CFMs, media sentiment, and capital flow responses.
The result of this paper shows that international media sentiment significantly affects the effectiveness of China's CFMs, with pessimistic sentiment posing challenges to achieving policy objectives. To tackle this challenge, improved coordination with fiscal and macroprudential policies enhances the effectiveness of CFMs. Fiscal and macroprudential policies not only directly strengthen CFMs in regulating cross-border capital flows but also improve media sentiment, with fiscal policy playing a notable indirect role in improving the economic structure. In contrast, monetary policy fails to significantly improve policy effectiveness. Furthermore, alignment between policy communication strategies and the regulatory objectives of cross-border capital flow management fosters a more favorable media sentiment environment. However, increasing the disclosure intensity of policy related information yields no significant benefits.
To improve the effectiveness of China's CFMs, this paper suggests the following: establish real-time tracking of international media sentiment to preemptively address adverse narratives; prioritize fiscal and macroprudential tools to address root causes of capital flow volatility, such as credit defaults or overcapacity; align policy communication with CFMs' objectives while avoiding over-disclosure that could erode credibility.
