Blog Post

Towards further liberalisation of the capital account in China

In China, discussions on capital account liberalisation have recently intensified. The Chinese government plans to gradually liberalise certain capital account items in the areas in which there is sufficient demand from the real economy and areas with relatively low investment risk, while maintaining tight regulation/supervision over the other items of the capital account and the financial sector. In response, Korean financial institutions need to establish strategies that will enable them to take part in this change, especially in the areas expected to undergo capital account liberalisation in the early stage.

By: Date: February 25, 2013 Topic: Finance & Financial Regulation

Summary: In China, discussions on capital account liberalisation have recently intensified. The Chinese government plans to gradually liberalise certain capital account items in the areas in which there is sufficient demand from the real economy and areas with relatively low investment risk, while maintaining tight regulation/supervision over the other items of the capital account and the financial sector. In response, Korean financial institutions need to establish strategies that will enable them to take part in this change, especially in the areas expected to undergo capital account liberalisation in the early stage.

Discussions on capital account liberalisation in China made significant headway in 2012, and various moves will be made in this direction to further open the capital account. China became one of the International Monetary Fund’s Article 8 countries in December 1996, making its current account fully convertible. After its accession to the World Trade Organisation in 2001, China partially opened its financial market, including commercial banks, while maintaining strict control over cross-border FX flows on the capital account.

However, the efforts to liberalise the FX market were suspended for years with the onset of the global financial crisis. Then, in January 2012, Zhou Xiaochuan, then the governor of the People’s Bank of China (PBOC), said that China would not refuse to make its currency increasingly convertible on the capital account. Following this, the PBOC’s Financial Survey and Statistics Bureau published a report in February 20121, in which it presented both short- and long-term roadmaps for capital account liberalisation; the report also drew parallels with the experiences of other countries, and acknowledged that the time was ripe to accelerate liberalisation of the capital account.

The State Administration of Foreign Exchange (SAFE) announced a plan to “liberalise the capital account in an orderly manner” in a press release; top officials, including Xie Ping, Vice President of the China Investment Corporation (CIC) and Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC) and a strong candidate for the next governorship of the PBOC, repeatedly emphasised the need for, and the importance of, such moves. In September 2012, the PBOC published the 12th Five-year Plan to Enhance and Reform Financial Industry jointly with three major financial supervisory authorities and the SAFE, which set out the order and principles of capital account liberalisation and emphasised coordination with financial market liberalisation and internationalisation of the renminbi.

China seems keen on capital account liberalisation amid soaring overseas investment by Chinese businesses and financial institutions, and the quickening pace of the renminbi’s internationalisation in the wake of the global financial crisis. Between 2007 and 2011, China’s ODI (outward direct investment) almost tripled from US$ 26.5 billion to US$ 74.6 billion (Table 1). And the government acknowledged that capital account liberalisation would be a prerequisite for internationalisation of the renminbi, and would also facilitate the implementation of the New Development Strategy to shift the focus of the growth strategy from exports to domestic demand over the mid-to-long term.

Moving towards capital account liberalisation, the Chinese government emphasises a step-by-step approach to minimise FX market instability. Currently (Table 2), China completely bans transaction in four out of 40 items on the capital account (by IMF criteria) including foreigners’ issuance and trading of derivatives within China; it partially allows 14 items including investment by Qualified Domestic Institutional Investor (QDII) and Qualified Foreign Institutional Investor (QFII). The country plans to gradually liberalise the capital account, lifting restrictions item-by-item.

Meanwhile, the 12th Five-year Financial Plan mapped out plans to a) start with deregulation of direct investment; b) expand convertibility in equity market through liberalisation of domestic capital markets and foreign stock investment; c) ease regulation and reform the supervisory system on overseas borrowing; and d) gradually allow individuals’ transactions on the capital account.

Additionally, the PBOC introduced both short- and long-term road maps to ensure sufficient demand from the real economy, and to start with capital account liberalisation in areas with fewer risks. Easing regulation on direct investment would be a short-term task (1~3 years), and deregulating commercial finance with relatively less risk would be a mid-term task (3~5 years). In the asset market (real estate, equity and bond), a long-term task will be implemented over five to ten years by first liberalising bond issuance and parceling-out, and allowing non-residents’ domestic transactions.

The Chinese government sees that poor external debt management was largely responsible for the financial and fiscal crises in East Asia and the euro area. Thus, it is likely to maintain close supervision over external debts. Various control/supervisory measures will be maintained over in- and outflows of convertible FX, and the government will intervene in case of market shocks or if excessive short-term, speculative capital inflows are detected.

Against this background, Korea should make efforts to share its experiences with China, and establish strategies to deal with the advancing capital account liberalisation in China. Both countries are extensively analysing related experiences, and sharing information would help to enhance bilateral financial cooperation, and better foresee the movements of the Chinese capital market. Korean financial institutions should pay closer attention to the areas of early capital account liberalisation (eg FDI and trade finance) that will have immediate impact on the market, and should explore how to respond to the forthcoming changes.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic

Policy Contribution

How to improve European Union cohesion policy for the next decade

This policy contribution investigates the performance of the design, implementation and effectiveness of cohesion policy, the most evaluated EU tool for promoting economic convergence. By analysing the effects of cohesion policy on economic growth through reviewing literature, conducting empirical research by comparing regions, as well as considering attitudes and expectations collected through interviewing stakeholders, the authors provide reform recommendations.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: May 23, 2019
Read article Download PDF More on this topic

External Publication

Europe – the global centre for excellent research

This report, requested by the European Parliament's Committee on Industry, Research and Energy, analyses the EU’s potential to be a global centre of excellence for research as a driver of its future growth in a complex global S&T landscape, and how EU public resources can contribute to this.

By: Michael Baltensperger and Reinhilde Veugelers Topic: Innovation & Competition Policy Date: May 22, 2019
Read article More on this topic

Blog Post

India in 2024: Narendra Modi once more, but to what end?

Even with the recent economic slowdown, India still boasts Asia’s fastest growing economy in 2018. But beneath the veneer of impressive GDP expansion, uneasiness about India’s economic model clearly tempers enthusiasm.

By: Alicia García-Herrero and Trinh Nguyen Topic: Global Economics & Governance Date: May 17, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Opinion

Trade war: Is the U.S. panicking due to China's big hedge?

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 9, 2019
Read article More on this topic More by this author

External Publication

Can emerging markets be a source of global troubles again?

According to popular perception, emerging-market economies have not experienced serious macroeconomic and financial turbulence since the beginning of this century. This perception was not entirely correct because it disregarded spill-over effects of the global financial crises of 2008–2009, the consequences of the decline of oil and other commodity prices in 2014–2016, economic and financial troubles caused by violent conflicts and regional political instability.

By: Marek Dabrowski Topic: Global Economics & Governance Date: May 9, 2019
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More on this topic More by this author

Opinion

What else China can do to support growth in the short term

Recent data shows the downward spiral in the Chinese economy has somewhat eased on a cyclical basis, but it is still too early to cheer for a full stabilization.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 23, 2019
Load more posts