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China's New Economic Agenda: Policy Implications for Liberalizing the Capital Account
By Pu Yonghao
Introduction
In recent years, there has been considerable discussion of the impact of globalization on the Chinese economy. The consequence of China's entry to the World Trade Organization for capital mobility and exchange rates is a key issue. China's controlled capital account system, although not fully effective, has helped the authorities conduct independent monetary policy, preserved public confidence in the domestic financial system, and served as a firewall during the Asian financial crisis. However, with Asian economies coming out of crisis, China's economy posting a strong recovery, and accession to the WTO a certainty, financial liberalization and capital account convertibility have been placed back on the agenda.
The strengthening of market forces has important implications for macroeconomic policy management in general, and for monetary and exchange policy in particular. Domestic reform and deregulation lead to greater external openness, while external liberalization reinforces domestic reform and deregulation. In liberalizing cross-border capital movements, the links between the Chinese economy and the international economy will be tightened, thus accelerating China's globalization process, with its embedded risks and opportunities. A set of closely associated questions about prudential norms, the regulatory framework, information disclosure, accounting standards, and risk management need to be addressed. The collapse of the Guangdong International Trust and Investment Company (GITIC) and other ITICs are sobering examples of the importance of prudent management of cross-border financing. Furthermore, opening the capital account in China requires addressing a number of pressing economic policy issues.
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