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Huang Yiping on Opening up of Capital Account

Sep 13-2020   



To open up the capital account is an inevitable choice for China, and there might not exist a so-called optimal timing, said Prof. Huang Yiping, Deputy Dean of the NSD, during the recently held 2020 China International Finance Forum.

 

The push for the opening up of the capital account has been in exertion for a long time, recalled Prof. Huang. In 1996, the current account was made convertible, and it was thought that within five to ten years’ time – or perhaps a bit longer – the capital account would follow suit. However, due to the drastic changes in economic and financial conditions both home and abroad, full convertibility is yet to happen.

 

Efforts for full convertibility have been continuously made over the last several decades. The tactic can be summed up as: prioritizing inflows over outflows; prioritizing long-term issues over short-term ones; and prioritizing equity over investment portfolios. It can be said that nowadays the capital account is largely convertible, except for the existence of many controls over cross-border capital movement.

 

So, what’s next? Prof. Huang shared his take on three issues. The first one is whether the capital account should be opened up. His answer is an unequivocal yes. China is still heading in the overall direction of reform and opening up, with decades of success to back it up. Reform means embracing market economy, and opening up means integrating with the world economy. Continuing down the road, and the capital account is bound to open up. The fact that China is now the second largest economy in the world and is on way to become the largest soon also underlines the inevitability of integration and opening up.

 

The second issue concerns the timing, and Prof. Huang argued that the best timing might be hard to come by. Some countries have chosen to open up the capital account in a time of good economic and financial situations, as conventional wisdom prescribes, yet overheating and asset bubbles ensue. When opening up in less optimal conditions, countries might reap the benefit of extra attention to risk prevention and management.

 

For opening up to materialize, Prof. Huang advised the adoption of macro-prudential policies and prioritizing of different measures. In a nutshell, he advocated the same principles for both economic and financial opening up: focus on the real economy first, then on the finance; focus on domestic issues first, then on international ones; focus on exchange rates first, then on capital. For example, only when the mechanism of exchange rates is sorted out, should cross-border capital flows be opened up.

Huang Yiping on Opening up of Capital Account

Sep 13-2020   



To open up the capital account is an inevitable choice for China, and there might not exist a so-called optimal timing, said Prof. Huang Yiping, Deputy Dean of the NSD, during the recently held 2020 China International Finance Forum.

 

The push for the opening up of the capital account has been in exertion for a long time, recalled Prof. Huang. In 1996, the current account was made convertible, and it was thought that within five to ten years’ time – or perhaps a bit longer – the capital account would follow suit. However, due to the drastic changes in economic and financial conditions both home and abroad, full convertibility is yet to happen.

 

Efforts for full convertibility have been continuously made over the last several decades. The tactic can be summed up as: prioritizing inflows over outflows; prioritizing long-term issues over short-term ones; and prioritizing equity over investment portfolios. It can be said that nowadays the capital account is largely convertible, except for the existence of many controls over cross-border capital movement.

 

So, what’s next? Prof. Huang shared his take on three issues. The first one is whether the capital account should be opened up. His answer is an unequivocal yes. China is still heading in the overall direction of reform and opening up, with decades of success to back it up. Reform means embracing market economy, and opening up means integrating with the world economy. Continuing down the road, and the capital account is bound to open up. The fact that China is now the second largest economy in the world and is on way to become the largest soon also underlines the inevitability of integration and opening up.

 

The second issue concerns the timing, and Prof. Huang argued that the best timing might be hard to come by. Some countries have chosen to open up the capital account in a time of good economic and financial situations, as conventional wisdom prescribes, yet overheating and asset bubbles ensue. When opening up in less optimal conditions, countries might reap the benefit of extra attention to risk prevention and management.

 

For opening up to materialize, Prof. Huang advised the adoption of macro-prudential policies and prioritizing of different measures. In a nutshell, he advocated the same principles for both economic and financial opening up: focus on the real economy first, then on the finance; focus on domestic issues first, then on international ones; focus on exchange rates first, then on capital. For example, only when the mechanism of exchange rates is sorted out, should cross-border capital flows be opened up.