What should China do when its capital account is open?
- By Zhang Monan
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E-mail China.org.cn, July 7, 2015
For the first part, China implements a policy of private overseas investment with "partial restriction and limited outflow". China's State Council suggests the establishment of a private overseas investment system, beneficial to adjusting and optimizing China's external balance sheet. In the past, China mainly invested its foreign reserves into US bonds. Encouraging direct foreign investment not only helps China balance its trade but also helps China avoid the so-called risks of currency mismatch and capital gains and losses. The other two parts are of high leverage ratio and are difficult in risk management mainly because they are the domestic money market, trust market and trading derivatives not participated by the civilians. So, the world takes a cautious attitude towards these parts.
The point is that when the capital account is opened, China should comprehensively establish a risk-control frame for the opening capital account, following the principal of "a long-term opening before the short term opening and a direct opening before the indirect opening" so as to supervise the cross-border capital and manage the risk, which helps take the initiative in controlling capital flow.
First, supervise the risk of short-term capital flow. The high liquidity of the security investment in the short-term capital flow brings high market volatility; because short-term securities are of high uncertainty and debt service risk, whenever a big financial event or the US hikes interest rates, China should take temporary control measures in a well-targeted manner and with great efforts.
Second, supervise the key cross-border financing projects. To avoid the sharp increase of debt risk after the capital account is opened, the regulators need to strengthen the risk management rules of the cross-border financing scale, currency and maturities. The market can accordingly calculate the amount and structure of its cross-border financing on its own, which can effectively avoid the external debt expansion and currency mismatch to guard off a possible external debt crisis. It also must focus on supervising illegal capital, such as money laundering, terrorist financing and overuse of tax havens of the cross-border financial deals.
Finally, a fundamental way to deal with the risk of cross-border capital flow is to actively participate in the global financial management and rules making. It is also fundamental to actively promote the international exchange rate system, adjusting the system of international balance of payment and management of international capital flow as well as the reform and coordination of the international financial policies. This is an institutional framework to effectively avoid the risk of capital account opening at the global level.
Zhang Monan is a researcher at the China Center for International Economic Exchanges.
This article was first published at Chinausfocus.com To see the original version please visit http://www.chinausfocus.com/finance-economy/what-should-china-do-when-its-capital-account-is-open/
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