The Impact Of Capital Account Liberalization On China's Economic Stability

China's economy had performed very well in recent years, but the RMB appreciation expectation had risen up and U.S. asked China to open its capital market, mainly because that the increased global imbalance of BOP brought excess liquidity and China's FX reserves built up rapidly. Economic globalization has made international capital flow increased. Though China had rigid control on capital account as far as rule of law concerned, in fact international capital flow had been more and more freely in China. How to manage the process of China's capital account liberalization to keep rapid economic growth rate and avoid financial crisis? Should the authority speed up the process or slow down the process, or carry out more rigid control?Following China's situation in the post-WTO, the paper analyses the efficacy of China's current capital control and discusses the preconditions of further capital account liberalization. Then the paper supposes some important problem which may happen if speeding up China's capital account liberalization.Trying to find the micro-foundation, the paper makes research on how the international speculative capital flow into china and make profits in China on the background of finance openness and RMB appreciation expectation. The main investment methods of international speculative capital include:①investing in money market and waiting for the RMB appreciation;②betting the RMB appreciation in the NDF market;③investing in capital market for the return on the asset price revaluation and RMB appreciation;④investing in real estate market;⑤others. According to the above introduction the paper discusses the relationship among capital flow, interest rate and exchange rate in one economy of finance openness to understand how capital account will affect China's macro-economic stability. The paper focuses on how the policy of keeping negative interest rate differential to hold up international speculative capital flow in will affect economic performance. And the paper focuses on what the policy of decontrolling on capital flow out to cope with RMB appreciation will result and what the main risk is. We found that compared with interest rate differential the expectation of RMB appreciation play one much more important role on the international capital flow. So, the authority could use the interest rate policy to restrain overinvestment and prevent the rate of credit growth out of control and in the same time they don't need too much worry about that raising interest rate will have big impact on international capital flow. In order to prevent international speculative capital flow in, the authority should properly cope with the expectation of RMB appreciation and take one set of policies to manage inner and external imbalance. Though the authority have a good will to take the policy of keeping rigid control on capital flow in while decontrolling on capital flow out, in practice it is most probable that more capital will flow into China and the international capital flow across China will be out of control. In one long time period, China's monetary policy will face the triangle dilemma among keeping exchange rate stable, deflating monetary and improving bank performance. One object had to be missed in order to achieve the other two objects.The paper also discusses China's financial risk which is the hottest issue when discussing capital account liberalization. In the current special development level of China's financial market, closely connected with"exchange rate rigidity", too much liquidity will flow into China's real estate market and capital market and bring the risk of asset price floating drastically. Therefore the authority must pay enough attention to risk control if allowing foreign capital invests in China's capital market.