The Re-research On The Liberalization Of Capital Accounts With The Perspective Of The Exchange Rate Formation Mechanism Reform

In2012, our country claimed that an arrangement about the convertibility of capitalaccounts should be proposed as soon as possible. It is also probable that the time offully convertibility of capital accounts would be brought forward to the year of2015.The debate of whether our country should speed up the fully liberalization of capitalaccounts and the relationship between economic reforms once again becomes the focusof domestic academia. There are big disagreements between people who support theview that our country should fully open capital accounts as soon as possible and thosewho think that reforms should have some priorities, and that the liberalization of capitalaccounts should not have the highest priority. Therefore, it is necessary to have in-depthresearch on the related problems through both theoretical and empirical methods, so asto give some reference to the research of the liberalization of our capital accounts.Through the combination of theoretical and empirical methods, this article tries toexplore the effectiveness of capital controls, especially the role of capital controls playsin the maintenance of the effectiveness of monetary policy independence and thestability of nominal exchange rate, which is the foundation of the following research ofthe liberalization of capital accounts. Then, this article examines whether there are somepossible priorities between the liberalization of capital accounts and other economicreforms especially the exchange rate formation mechanism reform, which is also thecore problem in the debate above. Finally, this article analyzes whether there are somepositive changes of the effects of the liberalization of capital accounts and thedifferences of interest rates between home and abroad on the macro economy after thereform of exchange rate formation mechanism started in2005, which may support theresearch above, and at the same time further investigates the subtle relationship amongthe liberalization of capital accounts,the exchange rate formation mechanism reformand market-oriented interest rate reform. This article thus has the following mainconclusions:Firstly, there are still effects of capital controls on the control of short-term capitalflows and the maintenance of the nominal exchange rate stability and independence ofmonetary policy. Facing the complicated situations, it is necessary for our country tomaintain some capital controls. Those who think that the effectiveness of capitalcontrols have lost and should fully open the capital accounts as soon as possible maylack some empirical basis. Secondly, the liberalization of capital accounts and the reform of exchange rateregime do exist some priorities. The empirical results show that the financial trilemmahas certain applicability in our country. Overall, the reform of the exchange rate regimeswill help to offset the negative impact of the liberalization of capital accounts on themonetary policy independence, and help promote China’s monetary policyindependence. Therefore, the reform of exchange rate regime in China should havehigher priority over the fully liberalization of capital accounts.Thirdly, there are some positive changes of the effects of the liberalization ofcapital accounts on the real exchange rate after the reform of exchange rate formationmechanism started in2005. In contrast with the continually positive effect of theliberalization of capital accounts on the real exchange rate before the reform, the impactafter the reform is negative at the beginning, but will be much weaker in the laterperiods. therefore, we can also conclude that the expansion of exchange rate regimeelasticity may to a certain extent, ease the negative impact of the large capital outflowsled by the liberalization of capital accounts on the real exchange rate, thus once againproved that the reform of exchange rate regime does should have higher priority overthe liberalization of capital accounts and there is the necessity of the implementation ofcertain capital controls.Finally, after the reform, the real exchange rate is more sensitive to the spreads ofinterest rates between home and abroad, the interest rate marketization reform in ourcountry thus faces some challenges. But on the other hand, facing the reality that in thecurrent our country has not yet completed the interest rate marketization reform and thereform of exchange rate regime, and the spreads still large between home and abroad,the rationality of its capital controls still exist.