Kevin P. Gallagher  José Antonio Ocampo  ZHANG Ming YU Yongding

In many ways China can be seen as the great “globalizer”.  Rather than abruptly opening to global trade under the “Washington Consensus”, beginning in the early 1980s China followed the pragmatic expression attributed to its great reformer Deng Xiaoping: “cross the river by feeling each stone.” China combined opening to global trade with significant and gradually sequenced government attention to infrastructure, industrialization, and logistics to become the largest trader on earth in just a few decades.  Such an approach will prove even more important as China considers the need to globalize its financial sector.  The history of other emerging markets’ previous experiences with financial liberalization offer China some lessons as well.  Fully opening the Chinese financial system will require keen attention to prioritizing other important reforms and to designing a strong and flexible set of cross-border financial regulations. Such regulations will be important to preventing and mitigating financial fragility and ensuring that financial markets serve the productive employment of the Chinese people.

These words of caution come out of a February 2014 workshop of the Pardee Task Force for Regulating Capital Flows at Boston University. The workshop was sponsored by Boston University’s Global Economic Governance Initiative, along with Columbia University’s Initiative for Policy Dialogue, and the Institute for World Economics and Politics at the Chinese Academy of Social Sciences. It brought together scholars and policy-makers who discussed experiences with capital account liberalization in Japan, India, South Korea, Latin America, Central and Eastern Europe and beyond. Participants also reviewed the economic evidence pertaining to capital account liberalization, as well as new policy at the International Monetary Fund with respect to financial globalization.

This policy brief synthesizes some of the main themes and policy recommendations discussed at the workshop and presented in this report, though the specific recommendations discussed in this brief are our own. The main message is that China would do well to draw lessons from both the economics literature and country experiences with capital account liberalization. Such an approach would guide China to adopt a carefully sequenced and cautionary approach to capital account liberalization.

Capital Account Liberalization in China  

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Risks Associated with Capital Account Liberalization

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The Importance of Sequencing

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Lessons for China:  Reform and Regulate First

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