The effect of bilateral currency swap agreements on foreign capital inflows: Evidence from China

This study empirically explores the effect of bilateral currency swap agreements (BCSAs) on foreign capital inflows. Using data on foreign enterprises' cross-border investments in China over 2005-2020 released by Bureau van Dijk (BvD) Zephyr database, a multiperiod difference-in-differences (DID) estimation is used based on the signing of China's BCSAs over the period of 2009-2020. We find that the signing of BCSAs increases the total amount of foreign capital inflows by 9.97% and the number of foreign capital projects by 8.68% on average. Moreover, foreign capital inflows that come from economies with higher bilateral exchange fluctuations, fewer foreign exchange reserves, higher interest rates, higher tax rates, and lower institutional qualities are more responsive to the signing of BCSAs, especially for those horizontal capital inflows.