“Safe haven" or “risk source" ? The time-varying impact of geopolitical risk on China's short-term capital flows

This paper examines the dynamic impact of geopolitical risk on short-term capital flows using a time-varying parameter vector autoregression (TVP-VAR) model and analyzes the transmission mechanism through interest rate differentials and exchange rate expectations. The findings indicate that geopolitical risk is a significant driver of short-term capital flows in China, with increased geopolitical risk leading to short-term cross-border capital outflows. Impulse response analysis across different time points indicates that financial opening-up policies affect short-term capital flows, yet gradual financial opening-up has not significantly amplified the impact of geopolitical risk. Under the influence of geopolitical risk, interest rate differentials and exchange rate expectations play crucial roles in the transmission of financial market risks in China.