Capital Account Liberalization in China: Some Considerations

1. Capital Account Liberalization in China:Some Considerations Vivek Arora and Franziska Ohnsorge, International Monetary Fund February 2014

2. Outline • Benefits and Risks of Capital Account Liberalization • Policy Implications • China’s Approach in Context • International Experiences: Some Examples • Implications of China’s Capital Flow Liberalization for China and the for the World

3. Background Rising global capital flows, dominated by FDI Capital Flows to Advanced Countries (percent of GDP) Capital Flows to Emerging Markets (percent of GDP) • Policy Implications? Source: WEO and BOPS

4. Benefits and risks

5. Policy Implications

6. Some preconditions: macroeconomic, financial, institutional Source: WEO; WDI; World Bank WGI and staff estimates.

7. Integrated Approach to Capital Flow Liberalization

8. China’s sequence of measures

9. “Accelerate capital account liberalization” (February 2012 Report)

10. International experience: lessons • Israel 1987-2005 • (Flug, 2013) • Synchronized macro stabilization program • Sequencing: foreign residents new immigrants  asset managers  corporates  households • Closely monitored: approval converted to reporting requirements • Chile from 2000 • (Carrière-Swallow and García-Silva, 2013) • Synchronized move to exchange rate flexibility and inflation targeting • Sequencing: pension funds outflows first

11. Global implications of capital account liberalization in China: Capital Flows • Bayoumi and Ohnsorge (2013); He et al. (2012): • Capital account opening in China will likely be followed by substantial increase in gross portfolio flows. • Net outflows as domestic investors diversify savings. • Net portfolio outflows could dampen reserve accumulation. • Benelli (2011): • $500 billion increase in China’s private foreign portfolio asset holdings in EMs and decrease in China’s official reserve assets in US instruments would increase US bond yields by 60 bps and reduce EM bond yields by 240 bps.

12. Implications of capital account liberalization in China • Global Financial Stability: • Offshore RMB markets (Craig et al., 2013; Hooley, 2013) • Vulnerability to shocks from China (Hooley, 2013) • Financial Stability in China: • Reduced liquidity in alternative asset markets (local bond and equity markets, real estate markets, wealth management products) • Withdrawals of household savings deposits rising deposit rates  reduced bank profitability (Lardy and Douglass, 2011)

13. Conclusions IMF institutional view: no presumption of full liberalization for all countries at all times. But many countries with long-standing restrictions would benefit. China’s moves are in right direction. Implications for other countries through portfolio shifts. Carefully planned and implemented liberalization in China is in the interests of both China and the world.

14. Thank you 谢谢!