China’s Capital Account – An Open and Shut Case

As part of its push to give markets a “decisive” role in the economy, China has pledged to drop controls on the movement of capital and make its currency, the yuan, fully convertible.

China for years has maintained a “closed” capital account, meaning companies, banks and individuals can’t move money in or out of the country except in accordance with strict rules. The limit for individuals is currently $50,000 a year, while corporate investments need government approval.

Loosening those controls could bring in investment, not to mention offering Chinese savers new options beyond a sky-high property market and shady “wealth management products.” The risk is that it leads to unwanted swings in asset prices as speculative capital herds in and out. Capital controls are the main thing that has saved China from the turmoil that hit other emerging markets at the start of this year.

Officials have suggested that China could respond to dangerous movements of money by simply closing the capital account again. But backtracking would be a bad idea, according to a recent report from the London-based Official Monetary and Financial Institutions Forum.

“If you do this, don’t go back,” Gabriel Stein, an economist at the organization, told reporters in Beijing last week. “Don’t go back on your reforms in the face of opposition… The problem is that if you do people will say ‘we told you so’.” That could make it harder to push ahead again in the future, he said.

Mr. Stein knows whereof he speaks. He worked in Israel’s Finance Ministry in the 1980s, when the country was recovering from a botched capital account liberalization that ended in high inflation and a banking crash. Capital controls  were reintroduced in 1979, two years after being removed.

More In Currency
Could the Yuan Be Overvalued?
8 Questions: Eswar Prasad, ‘The Dollar Trap’
Taiwan Rejects Bitcoin ATMs
Chinese Official Praises U.S. Fed’s Tapering
Unperturbed by Government Shutdown, China Buys More Treasury Debt
The second time around, Israel took things more slowly, liberalizing over a period of 18 years from 1987 to 2005 – with more success.

In any case, China has to do a lot of work first to get interest rates in line with international norms. The central bank scrapped most controls on lending rates last year, but deposit rates are trickier. Officials fear that banks may jack up rates to grab more deposits, and then find their finances stretched to the breaking point. That in turn means a deposit insurance scheme has to be in place to protect depositors if a bank fails.

How long will it take to get all this ready?

“I would expect China will have a fully liberalized capital account by 2020,” said Mr. Stein. That’s because the leaders will be nearing the end of their tenure, and feeling their power wane as flunkies turn their attention to making nice with the next generation. If they want to make this their legacy, they had better get on with it, Mr. Stein reasons.

Yi Gang, the vice governor of the People’s Bank of China, said  last month that the central bank would study the so-called Tobin tax – a levy on financial flows that would keep investors from selling the currency – as well as other methods to curb short-term, speculative “hot money.”  Malaysia used a form of the Tobin tax during the Asian crisis, to stop cash from fleeing the country.

Mr. Yi made the comments in an article he wrote for the Communist Party journal Qiushi, or Seeking Truth, widely read by senior and up-and-coming officials. He was echoed by Guan Tao, head of the payments department of the State Administration of Foreign Exchange, who also said the Tobin tax was a possibility.

Mr. Stein contends that a Tobin Tax sends the wrong signal to investors, who want to know “If I go in, can I go out?” He notes that, after years of crises where markets periodically lost faith in the pound, the British currency actually rose after exchange controls were lifted in 1979. Mr. Stein attributes that to investors feeling more comfortable in the knowledge that the currency was convertible.

Even if a temporary reintroduction of capital controls works for a smaller country, reimposing them just at the time when investors want their money most could scupper China’s hopes of making the yuan a global reserve currency.

While countries like Malaysia, Nigeria and Chile have already started to hold a small part of their reserves in yuan, the currency still  has a long way to go before it can rival the dollar – or even the Swiss franc.


Hangzhou Royal Printing Co., Ltd is a leading printer in east China, mainly dealing with books, magazines , catalogues printing and packaging .
Our production inludes paper box (cardboard box,gift box,cigarette box,wine box, daily goods box, retail packaging, cosmetic box), paper bags (gift bags, shopping bags, wine bags, marketing bags, handbags) and printings of brochures, catalogs, magazines, books (hard cover and soft cover), children’s books, art books, cookbooks, journals, diaries, ring binders, presentation folders, notebooks, calendars, placemat/3D placemat、 postcards/3D Postcards, greeting/gift cards , leaflets, booklets, decals ,and etc. We are certified with SGS , Our products are widely exported to more than 30 countries including Australia, Europe, USA and Africa.more detail please click www.royalprintings.com.