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Capital Account Liberalization in China: Prospects, Prerequisites, and Pitfalls
By Mark A. Groombridge
Introduction
The currency crises afflicting Asia in 1997 and 1998 reopened the debate on the wisdom of capital controls and liberalization of the capital account for emerging market economies. In a world awash in what some pejoratively refer to as "hot money," where capital, or financial claims to capital, can be transferred across borders instantaneously with very low transaction costs, there is growing concern that investors and analysts can wreak havoc on developing economies. Well-known free market-oriented economists now debate the proper sequencing of reforms, of which capital account liberalization is part and parcel. Still others question the prudence of capital account liberalization altogether, instead calling for at least partial erection of capital controls.
Nowhere is this debate more salient than in the People's Republic of China. In 1997, the leadership in Beijing announced the goal of achieving capital account convertibility by the year 2000. Four years later, that goal has yet to be achieved. Moreover, it is now apparent that President Jiang Zemin and the PRC's "economic czar," Zhu Rongji, are much more sanguine about the desirability of such a move. Some four years later, while leaders in Beijing acknowledge the ultimate goal of achieving liberalization of its capital account, they no longer speak of any firm timetable, instead emphasizing a "gradual" liberalization.
It is clear that Beijing firmly accepts the conventional wisdom holding that the PRC avoided the Asian economic crisis because of its closed capital account. As John Williamson notes, there is a sharp distinction between those countries that fell ill from the Asian economic flu and those that did not. In his own words: "The one dimension in which there is a systematic difference between the two groups is with respect to whether or not they had liberalized their capital accounts" (Williamson 1998: 5).
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