The Yuan and Shanghai Pilot Free Trade Zone

In this paper, we present evidence as to the effects of the China (Shanghai) Pilot Free Trade Zone on China's capital controls which was initiated in September, 2013. It was a trial to introduce a combination of floating exchange rate and capital account liberalization into China's macro policy mix. We employ three methods to test the China (Shanghai) Pilot Free Trade Zone's impact on capital controls: price spread tests between Chinese Yuan in Hong Kong and Chinese Yuan, Renminbi yield gaps between onshore and offshore Renminbi markets, and Granger causalities in China's money supply and foreign interest rates. All these tests give consistent results suggesting that the impact of China's capital controls is weaker since the China (Shanghai) Pilot Free Trade Zone.