Study On China’s Capital Account Liberalization

With the deepening of the reform on the financial system in China,capital account liberalization has become a hot issue nowadays.At this stage,China has gradually stepped into the new period of economic transformation,and financial reforms certainly will become an enormous drive to accelerate economic transition and maintain economic growth.And capital account liberalization,as a precondition for efficient and free flow of capital,has become the top priority of the current financial reform.Viewing from the international environment,the bilateral and multi-lateral cooperation at this period of time have focused more on the combination between trade agreement and investment agreement.Therefore,restrictions on capital liberalization will not only result in limited allocation effect on free capital flow,but also pose obstacles on the multi-lateral cooperation and the setting of new international standards for China.Domestically,China has achieved a fast and stable development in its economy since the reform and openingup,together with an increasing rate of saving from both corporations and residents.As a result,the needs for financing channels and foreign market have been obviously growing.And thus,liberalization of capital account is more than an essential condition to take full advantage of foreign markets and international sources,but also a must choice for China to implement globalization strategy,be part of world economy as a whole,develop the “One Belt,One Road” strategy,and realize the RMB’s internationalization.Capital account liberalization,however,has always been a double-edged sword.Since the 1990 s,financial crisis had broke out for many times in the emerging markets,such as the 1997 Asian financial crisis triggered by the devaluation of baht,the Russian financial crisis in 1998 and the Brazilian currency crisis in 1999.All these events were,more or less,accompanied with the liberalization of capital account in emerging markets as well as the acceleration of international capital.Therefore,how to liberalize capital account on the basis of effective risk control has become the core issue,which is inevitable for the financial reform in China.Therefore,relevant researches on capital account liberalization both at home and abroad have been sorted out at first.And on this basis,the degree of openness of China’s capital account at the present stage has been measured from de jure and de facto perspectives respectively.And the trend change has also been explored through HP filter analysis,so that an overall evaluation on the current situation of China’s capital account liberalization could be given.And then,this paper has discussed the relation between China’s capital account liberalization and financial risk separately from the angles of theoretical view and empirical study,illustrating the main situation of financial risk that China is facing by the constructed currency risk index and the risk index of banking system.Furthermore,this paper has tested the relation between China’s capital account liberalization and financial risk with the methods such as cointegration test and building error correction model.On this basis,this paper has conducted the study to check whether the conditions is mature for China to further liberalize capital,and build the Probit model which will effect the degree of capital account liberalization while selecting variables such as economic factors,institutional factors,and fiscal factors.Besides,this paper also analyzes the expected degree of liberalization with the parameter that is estimated by the pooled regression and robust analysis of 88 countries’ panel data.Finally,proceeding from drawing experience of current account liberalization and research results,this paper has reclassified the control measures of China’s capital account especially focusing on analyzing the economic effects of generating rent-seeking and increasing costs on economic cooperation,and evaluated the degree of the effects of different types of economies so that the logic of the openness of service trade could be learned.And then,in accordance with the theory of the second best,advises for China to open the restricted items of capital account in the optimal order have been presented in the perspective of increasing productivity.In accordance with the research on the issues of China’s capital account liberalization,conclusions and enlightenments are mainly as follows:First,in recent years,China’s capital account has gradually shown a trend towards opening in general.Except for abnormal fluctuation in de facto perspective resulting from the global financial crisis,the trend of liberalization in China’s capital account could be obviously noticed,which has stayed at a level higher than medium.Seen from the perspective of different capital flows’ restriction,the inflow and outflow almost keep the same pace to liberalize.And,in de jure regulation,the openness degree of capital outflow is slightly higher than that of inflow,which is to say that the government has posed more restricted regulations and control on capital inflow.In the de facto perspective,capital inflow is lager than capital outflow all the while,which is mainly because,for a long period of time,China’s cheap labor and its preferential policies for foreign capital have attracted a large amount of foreign direct investment in China.Second,according to the specific regulatory projects of China’s capital account,opening degree of direct investment and other investment fields is comparatively higher,reaching the level of 70% to 80%.Opening trend is obviously to notice in restrictions of real estate transactions of capital account.The opening trend in private capital flow,however,turns out to be comparatively slower.Besides,according to the results of filtered trend by the HP Filter Analysis,a long-term trend towards opening has gradually been shown both in the de jure and de facto aspect.Overall,the de facto openness effectively facilitates the de jure deregulation,which in return further stimulates the facto openness.And a situation could be noticed that it’s similar to the situation of current account liberalization that presents the trend of convergence between De jure and De facto.Third,the pressure index of China’s exchange market has mostly been negative in recent years,indicating the consistent pressure of RMB appreciation.Among which,the pressure of RMB appreciation was more obviously shown from 1999 to 2007,and hit the peak in the first quarter of 2008.Afterwards,there’s also a strong appreciation pressure in 2010.And the risk of China’s banking system has been in up and down with its peak running up slightly.The bank risk index,influenced by the global financial crisis and the European debt crisis,increased significantly in the first quarter of 2011,and had been negative for some time.It’s because of the greatly increased amount of deposit resulting from the rapid development of bank sector in recent years.For this season,the overall risk of China’s banking system has been moderate.Fourthly,viewing from the risk of currency crisis caused by China’s capital liberalization,theoretically we could say that for the emerging-market countries,due to the expectation of high investment return and fast growth of economy,capital account liberalization will usually lead to a heavy flow of capital and a greatly increased demand for home currency,so that the risk of the exchange market pressure will dramatically increase.And when facing comparatively higher pressure of appreciation,the government,according to idea of the “Trilemma”,will usually choose to properly give up financial liquidity in order to maintain the stable exchange rate and independent monetary policy,and take restrictive measures to lower the openness degree of capital account.The result of empirical analysis is basically the same with the prediction of theoretically analysis.A long-term relation has existed between the openness degree of China’s capital account and the exchange market pressure,which has also been negatively effected by the capital account liberalization.In recent years,pressure on RMB appreciation have existed all the time,or EMP<0.Therefore,this kind of negative effect indicates that the increase in the openness degree of China’s capital account will strengthen the pressure on RMB appreciation in a long period.But the interaction between them will not be obvious in a short term.Fifthly,viewing from the perspective that China’s capital account liberalization causes the risk of banking system,theoretically we could say that capital account liberalization will give rise to the inflow of international capital,the expanding of international financing channels and the competition between international financial institutions.Therefore,the credit business of China’s bank sector will thus be affected and then largely expend.And the non-performing loan ratio will significantly rise when the economy is adversely affected or slows down so that the risk of the banking system will be raised.Therefore,the administering authority will certainly enhance the regulation and monitoring,increase the credit threshold and lower the credit line.As a result,increase in risk of banking system in the de facto aspect will probably result in fluctuations and downward trend in the openness degree of China’s capital account.From the perspective of the result of empirical research,the variation(first-order difference)in the openness degree of capital account has a positive effect on the banking risk index in a long term,which is to say,big changes of the openness degree of capital account will increase the risk of the banking system in a long term,and the impact factor is very obvious.Seen from the result of VECM,the adjusted power from short-term situation to long-term equilibrium,between two variables,is weak.And seen from the result of integrative coefficient,interaction in a short term is not obvious.Sixthly,according to the conditions for China to further liberalize the capital account,the result based on qualitative analysis indicates that the macro-economy develops well in China with foreign abundant exchange reserve,strong financial regulation and ability to execute.Although the financial development is comparatively weak,the overall conditions for opening and risk-resistance are comparatively complete.Seen from the result of quantitative analysis,the result of basic regression shows that a proper increase in a country’s the economic development and its openness degree will give rise to the increase in the openness degree of its capital account of this country.And the increase in the inflation of a country,however,will usually enhance the regulation and control in its capital inflow projects but pose a comparatively less effect on capital outflow.In addition,from the perspective of institution factors,improvement of political democratization in a country will also become a strong influence on capital account liberalization.However,for a country,the fiscal factor and its international liquidity won’t obviously affect its capital account liberalization.Besides,the results of all robust analysis remain the same with the basic regression,which double confirmed the stability of basic regression.Therefore,on the basis of the stimulated result after taking the data of China to the model,according to international experience we could learn that the practical openness level of China’s capital account is much lower than that China should reach.In other words,China has sufficient conditions to further liberalize it capital account.Seventhly,for specific opening sequence of the restricted items of China’s capital account,on the basis of the experience of opening in current account and the results of the theoretical model of service trade,this paper advises to give priority to take the restrictive measures which has great economic effects and could increase the cost of economic operation,and finally liberalize restrictive measures with weak economic effect and rent-seeking.Other categories will be in second place to liberalize.