Views expressed here
are totally my own
Capital Account Liberalization in China
Xin WANG
Financial Research Institute, PBC
International conference jointly organized by
OECD and SIC
July 14, 2009, Beijing
capital account(KA) administration
RMB partial convertible under KA; encourage FDI but much more
restrictive to external debt borrowings and portfolio investments, etc.
restrictions gradually relaxed according to BOP conditions and the
requirements of market economy; gradualist approach conducive to
financial stability
Key measures taken since 2002
- implement Qualified Foreign Institutional Investor scheme (QFII), now
US$30 bn quota
- encourage more outward direct investments
- allow MNCs in China to lend to their overseas entities
- implement Qualified domestic Institutional Investor scheme (QDII)
- Allow IFC, ADB to issue RMB-denominated bonds
- allow emigrant Chinese and nonresidents to transfer their legitimate or
inherited assets abroad
2
gradual KA liberalization a must
Assessment of China’s KA liberalization
- China’s financial integration(FI) lags behind according to international norm
- FI overestimated if considering a large share of reserve assets in China’s
foreign assets
- limited channels of outward investments: good news and bad news
Reasons for further KA liberalization
- make resource allocation more efficient
- improve corporate governance and strengthen domestic financial system
- a precondition for a bigger international role of RMB
measures taken after the global financial crisis
- all enterprises allowed to make overseas lending, not only MNCs
- increase short-term external borrowing quota for financial institutions to
support trade financing
- grant local branches of SAFE more autonomy to approve FX businesses
3
-
China’s foreign assets and liabilities relative to GDP
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2004 2005 2006 2007 2008
net asset/GDP assets/GDP liabilities/GDP
Source: SAFE.
4
China’s financial integration(FI) lags behind
China
FI=(foreign assets+foreign liabilities)/GDP
Source: Lane (2006).
5
financial integration: A comparison
4.5
4
3.5
3
2.5
2
Germany
1.5
China
1
0.5
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
FI=(foreign assets+foreign liabilities)/GDP;
Adjusted FI=FI*(1-RA), where RA=reserve assets/foreign assets
Source: Wang (2009).
6
China’s foreign assets dominated by FX reserve (2005)
100%
90%
80%
70%
60%
50%
China
40%
30%
20%
10%
0%
ia
nd
US
UK
il
co
ia
n
a
a
a
ea
a
a
e
pa
di
re
in
li
in
or
ys
la
az
xi
ss
ar
Ja
In
Ko
Ch
ra
nt
ap
la
ai
Br
Me
Ru
ro
st
ge
ng
Ma
Th
Eu
Au
Ar
Si
reserve direct investment portfolio investment other investment
Source: Wang (2007).
7
the way ahead
Push forward the KA liberalization, but the process manageable and
controllable
some personal thoughts:
- Make more outward direct investments, especially in resource and
energy sectors
- expand QFII and QDII schemes; strengthen prudential regulation
- encourage banks to provide more external lending including trade
credit
- allow more foreign entities to issue RMB-denominated securities
- Loosen the restrictions on foreign debt borrowings by domestic entities,
especially private ones
- further develop FX market and gradually increase the flexibility of
RMB exchange rate
- monitor and curb short-term, speculative capital flows
8