Transcript Capital Account Liberalization in China

Capital Account Liberalization in
China:
Some Considerations
Vivek Arora and Franziska Ohnsorge,
International Monetary Fund
February 2014
Outline
2

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
Background
Rising global capital flows, dominated by FDI
Capital Flows to Advanced Countries
(percent of GDP)
6
8
4
2
4
Portfolio - Equity
Portfolio - Debt
Other Flows
Direct Investment
Net
2
0
0
-2
-2
-4
-4
-6
-8
1990Q1
1991Q2
1992Q3
1993Q4
1995Q1
1996Q2
1997Q3
1998Q4
2000Q1
2001Q2
2002Q3
2003Q4
2005Q1
2006Q2
2007Q3
2008Q4
2010Q1
2011Q2
2012Q3
-6
Source: IMF BOPS, WEO.
Portfolio - Equity
Portfolio - Debt
Other Flows
Direct Investment
Net
1990Q1
1991Q2
1992Q3
1993Q4
1995Q1
1996Q2
1997Q3
1998Q4
2000Q1
2001Q2
2002Q3
2003Q4
2005Q1
2006Q2
2007Q3
2008Q4
2010Q1
2011Q2
2012Q3
6
Capital Flows to Emerging Markets
(percent of GDP)
Source: IMF BOPS, WEO.
Policy Implications?
Source: WEO and BOPS
3
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
Benefits and risks
Benefits
Risks
4
• Efficiency, financial competitiveness,
productive investment, consumption
smoothing
• “Collateral benefits”
• Macroeconomic volatility, vulnerability to
crises, larger output losses
• Magnified by financial/institutional gaps
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
Policy Implications
Policy
Implications
5
• No presumption of full
liberalization for all countries
at all times;
• Countries with long-standing
restrictions may benefit from
more liberalization;
• Follow considered, sequenced
“integrated” approach
Policy
implications
Benefits and risks
International
experience
China’s approach
Global
implications
Some preconditions: macroeconomic, financial, institutional
700
60
12,000
Emerging markets
600
50
10,000
China
500
40
400
30
300
20
-0.14
Regulatory Quality
-0.16
-0.18
-0.2
-0.22
Government Effectiveness
2012
2011
2010
2009
2008
2007
2006
2005
2004
-0.12
Source: WEO; WDI; World Bank WGI and staff estimates.
2013
2011
2009
2007
2005
2003
Institutional Quality
-0.1
-0.24
6
2001
2013
2011
2009
2007
2005
2003
2001
1999
1997
Export and Imports, in percent of GDP
(1995=100)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
80
70
60
50
40
30
20
10
0
0
0
1995
0
10
1999
100
2003
2,000
2002
200
1997
4,000
2000
6,000
1995
8,000
Lines: per capita GDP
growth (1995=100,
right axis)
1998
14,000
External debt,
in percent of GDP
1996
Per Capita GDP
(US$, PPP basis)
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
Capital Flow
Liberalization
Integrated Approach to Capital Flow Liberalization
Liberalize
FDI inflows
Liberalize FDI
outflows, other
longer-term
flows, and
limited shortterm flows
Greater
liberalization
Revise financial legal framework
Supporting
Reforms
Improve accounting and statistics
Strengthen systemic liquidity arrangements and
related monetary and exchange operations
Strengthen prudential regulation and
supervision, and risk management
Restructure financial and corporate sectors
Develop capital markets, including pension
funds
Greater Liberalization 
7
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
China’s sequence of measures
Year
Measure
2001
Resident corporates list overseas; resident individuals buy B-shares
2002
QFII scheme (nonresident portfolio investment in China)
2004
Approved corporates lend abroad; emigrants transfer limited assets abroad
2005
Nonresidents issue RMB bonds in China (Panda bonds)
2006
QDII scheme (resident portfolio investment abroad); eliminate approval and expand financing sources
for ODI
2007
Expand QDII institutions; raise QDII quota; residents issue RMB bonds offshore
2009
RMB use for trade and FDI settlement
2010
Approved central banks/foreign bank invest in Chinese bond market; resident corporates borrow
abroad
2011
R-FDI scheme (settle FDI in RMB); R-QFII scheme (portfolio investment by approved corporates with
subsidiaries in Hong Kong)
2012
QFII quota increased to $80 billion; R-QFII quota increased to RMB200 billion; quotas on central
banks/SWF removed
2013
R-QFII: Eligible institutions expanded; restrictions on asset allocation eased
8
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
“Accelerate capital account liberalization”
(February 2012 Report)
Final step: free convertibility
of RMB when ready
Greater scope for
foreigners to invest in
RMB assets, and
property
Acceleration of overseas RMB
lending
9
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
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
10
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
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):

11
$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.
Benefits and risks
Policy
implications
China’s approach
International
experience
Global
implications
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)
12
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.
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Thank you
谢谢!
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