Time to move toward an open capital account
By Shi Jianhuai (China Daily)Updated: 2007-06-22 10:09 Actually, the scheme of capital account control has been less strict than it is meant to be due to both internal and external pressure. As the third biggest trade power in the world, China is seeing increasingly open trade. The free trade scheme is often used to facilitate capital flows across the border without being watched by the authorities. Some international hot money sneaks into China's capital market with the help of exporters.
The financial opening-up has facilitated such money flows because the monetary authorities have no way to control foreign financial institutions in their business details.
The short-term foreign debt has been rapidly rising in recent years. The major source of such debt is the foreign invested financial institutions. The strong growth is propelled by the international expectation of a renminbi appreciation.
Moreover, it is now mission impossible for the monetary authority to approve every currency trade when the number of cases is so huge.
A pragmatic choice is to stop administrative control over the capital account, which is both costly and inefficient, and turn to a market-orientated governance.
A good example can be found in Chile, where all commercial banks and financial institutions must hand in a percentage from their foreign debts as a non-remunerated reserve requirement. The shorter the debts, the higher the percentage.
Such a policy tool over capital inflow is based on the rule of the market, which is better than administrative control. And it is also more flexible because the rate of the reserve requirement can be adjusted according to actual needs.
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In my opinion, the capital account should be liberalized as soon as possible once the country is ready. And opening the account should be done gradually.
China is currently seeing sound economic growth, relatively low inflation, considerable surplus in foreign trade and fiscal budget, abundant reserves of foreign exchange and a currency with appreciating pressure.
China's financial reform has achieved remarkable progress. The State-owned commercial banks were financially restructured, the State-held shares in listed companies have been liquidized, a network of financial supervision has been established, and the marketization of the interest rate has been largely put in place.
All these conditions prove that now is a good time for China to ease administrative control on the capital account and actively move toward liberalizing it.
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