Sustainability of Private Capital Flows: Comparing China with Mexico

Abstract

This paper attempts to explain the varying degrees of sustainability of private capital flows (PCFs) to China and Mexico, the two largest recipient developing countries of such flows in recent years. It tackles the question by comparing both the composition and causes of the flows. In using the first approach, PCFs to China were found to be more sustainable than those to Mexico because the former have consisted mainly of direct investment and loans, whereas most of the latter have been portfolio equity flows. Another explanation suggested by the second approach is that PCFs to China are mainly due to more sustainable factors such as the country’s huge size, the rapid growth of its domestic economy, its cheap labor, its far-reaching real domestic policy reforms, and its high savings rates. On the other hand, in the Mexican case, less durable factors such as external influences and domestic credit policy changes play an important role.