Research Center for International Finance
Policy discussion No. 2014.001, Mar. 6 2014
Whether China Should Accelerate Capital Account Liberalization Now?
ZHANG Ming
After U.S. subprime crisis, the cross-border capital flows in China have become larger and more volatile. People’s Bank of China (PBC) proposed a new timetable to accelerate capital account liberalization in 2012, and planned to fully open capital account by 2020. This essay argues against PBC’s proposal, and provides seven critiques on it. Instead of speeding up capital account openness, we suggest that Chinese government accelerate RMB exchange rate and interest rate liberalization, push forward domestic financial market reform, implement domestic structural adjustment, and participate in international cooperation to coordinate capital flow management.
NEW PLAN TO ACCELERATE CHINA’S CAPITAL ACCOUNT LIBERALIZATION
China’s current account was liberalized in 1996. Chinese government began to open capital account from 1994, but the process had been interrupted by Southeast Asia financial crisis in 1997-1998. Since then, a gradual and cautious way has been adopted to open China’s capital account (Zhang, 2012, 2013). By early 2012, according to the 40 sub-items of capital account transactions defined by IMF, there were 14 basically convertible, 22 partly convertible and 4 not convertible in China (PBC, 2012a). Among various capital flows, direct investment and trade finance are mainly liberalized, portfolio investment is under quota controls like QFII (Qualified Foreign Institutional Investors) and QDII (Qualified Domestic Institutional Investors), and money market plus financial derivative transactions are under strict controls.
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CRITIQUES ON THE PROPOSAL OF RAPID CAPITAL ACCOUNT LIBERLIZATION
Whether China should accelerate capital account liberalization at the current stage was the hottest policy debate around domestic political and academic circle in 2013. As mentioned above, PBC argued for it, but some scholars, including us, argued against it (Yu et al., 2013). Our major critiques on PBC’s new plan are as following:
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POLICY RECOMMEDATIONS
To summarize, we don’t agree PBC’s statement that China should accelerate capital account liberalization now. We argue that China’s capital account should continue to be liberalized in a gradual, cautious, and controllable way. At the same time, Chinese government should overcome various difficulties and promote the following reforms:
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