On The Orderly Capital Account Convertibility

After World War II, as driven by revolutions in science and technology and evolutions in production relations, the world productivity experiences a rapid development and economic globalization has become a strong trend of the times. In essence, economic globalization is to turn world economy into market economy, it is a comprehensive deepening of international labour division. Through accelerated global expansions, multinational corporations produce more and more goods in more than one country making the goods products of international labour division and co-operation. Economic globalization depends on world-wide rational deployment of resources, and also on world-wide free flow of capitals, one of the production factors, but what hinders capitals from flowing freely is capital control. To remove capital control and to realize convertibility under capital accounts is one of the most decisive reform measures in economic and financial globalization. In order to accommodate the development requirements of economic and financial globalization and to integrate themselves into the world trend of globalization as soon as possible, countries after countries have quickened their steps towards full convertibility of their local currencies. As a large open country, China has no reason to stay aloof from this trend. 20 years' practice of the open policy proves that opening and integration into world economic system as soon as possible is the successful and inexorable choice by China. Full convertibility of Renmingbi (RMB,thereafter) is an important signal and inexorable requirement of our further opening. According to "Resolutions on Certain Issues about Building a Socialist Market Economy by the Central Committee", passed in November 1993, the long-term objective of our foreign exchange reform is full convertibility of RMB and the ultimate objective is the internationalization of RMB. Experiences from countries where full convertibility has been achieved show that convertibility must start from current accounts and then proceed to capital accounts. In December 1996, China declared acceptance of Article 8 of International Monetary Fund and realized convertibility under current accounts. As a result, convertibility under capital accounts becomes a key policy objective of the government. It is very probable that China will join WTO at the end of this year, entry into which will objectively expedite the process of RMB convertibility under capital accounts. After China joins WTO, China will invest more in other countries and make it easier for overseas funds to flow into China. Large volume of in and out capital flows will lead to increasing demand for currency exchange under capital accounts. When this happens, the technical requirements and costs will be extremely high if we carry on exchange control by way of case-by-case registration, review and approval, expected regulation would also be difficult to achieve. Therefore, gradual deregulation of capital accounts and RMB convertibility under capital accounts will be the inevitable choice.Since World War II, the 60's of the 20th century in particular, western economics theories have done a great deal of research and study in convertibility under capital accounts, much helpful conclusion has been arrived at. In China, many scholars have also studied RMB convertibility under capital accounts since the end of the 80's, certain results have been achieved, but in general, problems are found with these studies. Among them, the first is the focus on certain aspects of the issue instead of the issue as a whole. Convertibility under capital accounts is an issue of social system engineering, missing any aspect or any segment will hinder the whole process. The second problem is that most western studies on convertibility under capital accounts were done before the 80's, and studies on the same issue are difficult to find after the 80's when economic globalization shows a strong tendency and capitals flow rather freely in the world. Because of changes in backgrounds and condi...