Macro-Finance Salon (No. 30): Capital Account Management and Convertibility
2016-03-22 IMI
Sun introduced China’s foreign exchange management of capital account transactions regarding its content and purposes. He also analyzed in detail the IMF’s attitude towards managing capital flows. He believed that the main purpose of such management were to prevent rapid surges of cross-border capital flows, especially short-term capital flows, and to maintain the balance of payments, so that a country’s financial system and economic development would not suffer severely from inflow surges or disruptive outflows. Sun pointed out that after the financial crisis IMF became more pragmatic on capital flow management, acknowledging its rationality under certain conditions. But IMF also noted that capital flow management was only a temporary measure because there were prerequisites.
Capital account convertibility, in Sun’s view, was an important part of China’s financial reform and opening up. Theoretically, less government interference in the financial system and market would help turn idle funds into productive investment outlays and channel funds to more productive sectors and regions. Therefore, financial development and economic growth could mutually support each other. Generally, the changes in global economic landscape gave China favorable opportunities and environment for financial reform and opening up. Sun believed that China should seize the “window period” of such changes to step towards financial liberalization. Specific measures included ending any form of financial repression that still exited, forming a market-oriented financial system, further promoting market-based interest rate and exchange rate, and progressively realizing RMB capital account convertibility. These required reformers to be courageous and farsighted enough. Meanwhile, RMB capital account convertibility needed overall planning, gradual improvement, and space for adjustment.
