Controlling cross-border capital flow is one of the cornerstones of China's reform and opening up. For more than 30 years since Deng Xiaoping initiated the reform, China's capital account control policy has guided the capital flow to the strategic development goal on the one hand, and maintained the stability of the financial system on the other. This period is the most successful economic growth stage in the history of China and even the world. During this period, the average annual economic growth rate of China exceeded 10%. In addition, China's reserved financial globalization enabled the reform to proceed smoothly as planned. In the 1990s, the financial crisis swept the world, and emerging markets were hit hard, especially in Asia. However, China's relatively closed capital account eased the impact of the financial crisis on China.
China leaders believe that China's economy needs to change its development model, and the China government has also made a series of reform attempts to realize the new development model. The gradual opening of the capital account began at 1994. So far, the China government has almost lifted all restrictions on foreign direct investment in China, and greatly relaxed the restrictions on indirect investment (but still managed the amount of indirect investment), but cross-border money market transactions and financial derivatives transactions are still strictly controlled. However, with the internationalization of RMB, the opening of China's capital account has been accelerating since 2009. The RMB transaction settlement mechanism and the so-called "return mechanism" have greatly relaxed the restrictions on cross-border short-term capital flows. The RMB trading in Hong Kong has created a lot of opportunities and risks for arbitrage by using the RMB exchange rate spread. The stable expectation of RMB appreciation leads to the hot arbitrage of RMB. With the development of offshore RMB trading markets such as Hongkong and the partial opening to cross-border short-term capital flows, some people think that China's capital account is more open than stated in official policies. According to relevant calculations, the cross-border bank credit exposure in China in 20 14 reached 1 trillion US dollars, equivalent to 12% of China's GDP (verma, 20 14). Since 2009, China has actually formed a "dual track system" for the supervision of capital flows: cross-border capital flows settled in US dollars are still managed more strictly by the State Administration of Foreign Exchange under the People's Bank of China; The cross-border capital flow settled in RMB is managed by the subsidiary department of the Second Division of Monetary Policy of the People's Bank of China, and the supervision is far looser than the former. In other words, the practice of RMB internationalization has actually further loosened China's cross-border short-term capital flow.
The Third Plenary Session of the 18th CPC Central Committee held on 20 13 once again confirmed this trend. The China Municipal Government stated that it will "promote the two-way opening of the capital market, improve the convertibility level of cross-border capital and financial transactions in an orderly manner, establish and improve the management system of foreign debt and capital flow under the macro-prudential management framework, and accelerate the convertibility of RMB capital projects." (the Central Committee of the Communist Party of China 20 13)
Therefore, it is meaningless to argue whether China should open the capital account, because the China government has made a decision to promote the opening of the capital account. However, it is still of vital significance to discuss how to open the capital account and at what speed.
Second, the risk of capital account opening.
Theoretically speaking, when a country's ability to manage its financial sector reaches a certain threshold, capital account opening can bring huge economic benefits. Opening the capital account can promote competition in the financial sector, promote investment diversification and improve the current account imbalance. By the end of last century, many developed and developing countries had opened their capital accounts.
However, economic research has not found that there is an inevitable relationship between capital account opening and economic growth in emerging market economies. On the contrary, there seems to be a correlation between the opening of capital account and the outbreak of financial crisis. In addition, there is evidence that the opening of capital account may lead to the deepening of inequality.
What is more noteworthy for China is that there is new evidence that the opening of capital account will aggravate inequality. An IMF study (20 13) completed by Furceri and Loungani observed the cases of capital account liberalization in 50 developed economies. It is found that the degree of economic inequality (measured by Gini coefficient) will increase by about 1% one year after the capital account is fully opened, and will increase by 2% five years later.
In addition, government officials and economists worry that the opening of the capital account will weaken a country's ability to formulate economic policies. In the aspect of capital account opening, policy makers are always in a "three difficult choices". Robert Q Mundell, an economist, further theorized Keynes's related research, pointing out that a country can only use two of the following three policy tools at the same time: interest rate as a monetary policy tool, exchange rate control and management of cross-border capital flows.
In fact, the weakening of policy control caused by the opening of capital account may be more serious than what Mundell said. The relevant departments may completely lose control of the currency, so to some extent, they can only choose where the fluctuation of the capital account is revealed: in the total amount of money and credit, or in the exchange rate. For China, intervening in the exchange rate to deal with the "three difficult choices" has paid a huge write-off cost.