With the openness of Chinas capital account, the impact of crossborder portfolio flows on domestic financial markets is also increasing. In this context, this

paper constructed an improved ISLMBP model to investigate the interaction between crossborder portfolio flows and domestic financial markets. Based on monthly data from July 2005 to August 2016 and employing MSVAR model, this paper also empirically examined their nonlinear relationships. The results are as follows. First, the interaction between portfolio flows, equity returns, exchange rates and interest rates varies between regimes. Regime one covers the period of subprime crisis in 2008, European sovereign debt crisis from 2010 to 2012, and the aftercrisis periods from 2015 to 2016, which is described as “lower stock market returns, less crossborder portfolio flows, higher interest rates and higher market volatility”. Regime 2 covers the period of presubprime crisis from 2005 to 2006, aftersubprime crisis period from 2009 to 2010, and afterEuropean sovereign debt crisis from 2013 to 2014, which is describes as “higher stock market returns, more crossborder portfolio flows, lower interest rate and lower market volatility”. Second, the interaction between four variables is more significant in regime one, which with higher market volatility and faster liberalization progress. The conclusion is quite relevant for the further opening of capital account in China.