The Core Condition Of Capital Account Convertibility: Legal Protection Of Investors

This paper focuses on the condition of capital account convertibility. If a country allows its capital account convertible, it can benefit a lot from free flow of capital. However, sustainable capital account convertibility requires certain conditions, because capital account convertibility with the lack of these conditions may cause disasters such as financial crisis. Therefore, to study the necessary conditions of capital account convertibility will be of great theoretical and practical significance.Firstly, this paper comments briefly on current domestic and foreign literatures about the conditions of capital account convertibility, and points out the shortcoming of those literatures. This paper try to cover the shortcoming and put forward a new idea that legal protection of investors is decisive factor of sustainability of international balance of payments structure and also is the core condition of capital account convertibility. Meanwhile, this paper also describes the concept and quantization of legal protection of investors.Secondly, through theoretical and empirical analysis, this paper explains how legal protection of investors ensure realization of both fiscal and trade balances and make international balance of payments structure sustainable. In terms of theoretical analysis, this paper analyzes the relationships between legal protection of investors and sustainability of international balance of payments structure, current account, economic growth, inflation, fiscal deficits and exchange rate stability. This paper also describes the role of legal protection of investors in the maintenance of domestic fiscal balances from the perspective identities of national income. When it come to empirical analysis, through regression analysis, this paper proves that legal protection of investors played a more important role than any other macroeconomic variables which affected the collapse of both exchange rate and stock market. So we come easily come to a conclusion that legal protection of investors is the core condition of capital account convertibility. Finally , this paper described the current situation of the legal protection of investors in China and existing problems of the legal protection of investors in China,and proposed some political suggestions.