Conversion Of Reminbi: Theory, Experience, And Policy

AbstractSince the Chinese authorities liberated Renminbi under the current account at the end of 1996, the conversion of Renminbi has become the primary goal in the reform of China's financial system. There still remain some questions the policy makers have to answer: What is the profits and costs of liberating the capital account of China? How should China design the opening plan to maximize these profits and at the same time control the risk brought out by such a reform? Questions like these are what this paper endeavors to answer.Chapter one draws forth the topic, that is to say conversion of Renminbi under capital account and briefly reviews the history of Renminbi conversion reform under the current account. Particularly, the paper discusses the significance of currency convertibility and sets this topic in the frame of financial liberation in the developing countries. With the deepening of economic globalization in the past fifty years, the financial liberation is the key for developing countries to breakthroughs in the economic progress through which the elimination of conversion obstacles is one important step.Chapter two theoretically analyses the gains and costs brought about by opening capital accounts in the developing countries. First of all, the capital inflows can fill the double gaps peculiar to the developing countries, namely the investment-saving gap and the foreign exchange gap, thereby forming the capital base necessary for the economic development. Secondly, since the rate of return in the developing countries is less correlated with that in developed countries, the liberation of capital account in the developing countries can facilitate investors' adjustment of their portfolio in the global market to avoid the specific risk in the domestic market. Finally, the domestic financial banks are obliged to provide service of higher standard and of more sorts under the fierce competition, which can tap the saving potential in the developing countries.Every coin has two faces, financial liberation not the exception. As far as the developing countries are concerned, capital inflows of large scales will increase their effective exchange rate of the currency and destroy the effectiveness of the monetary policy in countries that maintain the fixed exchange rate system. Furthermore, financial opening can also magnify the risks inherent in the domestic financial system.In chapter three, the author employs the empirical methods to study the experience and lessons drawn from the history of other developing countries. The author chooses the case of Chile and Southeast nations. The former previously met with defeat on the way of liberating the capital account and won the success after Chile changed to a step-by-step opening strategy while the latter encountered the financial crisis in the past two years. Their lessons puts emphasis on the sequencing of the financial liberation, the flexibility of the exchange rate system, and the systemic repulsion to the international hot money of short period and etc. Chapter four is intended to study China's policy making while opening the capital account on the basis of China's circumstance. Firstly, China's financial liberation should proceed in a prudential, orderly, and comprehensive way. The task of top priority for China is to accelerate the domestic economic and financial reforms. Secondly, that Renminbi floats to a greater extent would contribute to the effectiveness of the monetary policy in our country. Thirdly, it is of significance for China's government to enhance the ability to match such policies as monetary, fiscal, and exchange policies. The last but not the least, China should not release capital control abruptly. Instead adequate capital control could currently win time for further reforming the distortion in the domestic economic and financial system.