Peer reviewed analysis from world leading experts

Is China ready to open its capital account?

Reading Time: 5 mins

In Brief

The People’s Bank of China (PBC) and five other authorities announced on 2 March a further removal of restrictions on trade settlements in renminbi.

This is a bold step toward a completely liberalised use of the renminbi under the current account.


  • A
  • A
  • A


  • A
  • A
  • A

Could this also be the beginning of a full liberalisation of China’s capital account? And do these developments bring China closer to an internationalisation of the renminbi and a ‘dethroning’ of the US dollar as the world’s leading investment and reserve currency?

The discussion in China on capital account liberalisation, a major precondition for internationalising the renminbi, has intensified after the PBC released a new blueprint for accelerating the opening up of China’s financial sector. A senior central bank official gave an interview to the China Securities Journal on 24 February, outlining a three-step plan for liberalising the capital account over the next ten years. The first three years would see a loosening of direct investment controls and a liberalisation of capital flows out of China. The next three to five years would see deregulation of commercial credit controls and an increase in foreign renminbi-denominated lending by Chinese banks. And within five to ten years, China would ‘gradually open up trading of real estate, stocks and bonds to foreign investors’. By the end of this process, China would have achieved a great (and yet unspecified) degree of convertibility of the renminbi.

This announcement can be seen as an affirmation of the PBC’s irreversible goal of internationalising the renminbi, despite increasing domestic debate. It can also be seen as an attempt to change the perceived Chinese approach of ‘muddling through’ these issues. And finally, it suggests the strategic time for China to open up its capital account is now, and that the risks of opening up are controllable. Making the plan public was certainly also a test to gauge public sentiment on this matter — with the responses including both applause and anger.

Economic historian Barry Eichengreen points out in his recent book, Exorbitant Privilege, that the US dollar went from having no international role to being the leading international currency in less than a decade. Similarly, the renminbi could be very quickly accepted as a major currency for invoicing and settling trade, as a currency for undertaking financial transactions and investments, and as a major reserve currency for central banks. So is the world likely to witness the renminbi’s dominance any time soon?

Not yet. Although the goal of capital account liberalisation was put forward in China’s Twelfth Five-Year Plan, it would also require major advances in domestic financial reform — a politically difficult task.

The PBC is trying to use this discussion on the renminbi’s internationalisation to push for domestic financial market reform, and also the reform of monetary and exchange rate policy. Divisions exist within China’s different branches of government, with the PBC being more liberal and reform-oriented, while other authorities pursue a largely cautious approach. There is a strong voice for liberalising controls over interest rates, as this could allow for more lending to small- and medium-sized firms, and for floating the exchange rate within a broader band to grant more space for monetary policy autonomy. Political pressure to speed up reform is even stronger because of this year’s power shift.

The Chinese private sector, by and large, supports market-oriented financial reform, while state-owned sectors are more hesitant. In particular, state-owned banks, which for the past few years have been subsidised by negative real deposit rates, and state-owned enterprises, which have enjoyed monopoly privileges, strongly oppose aggressive domestic financial liberalisation. The government would also have to give up much of its influence over the domestic banking system, which has been one of its most powerful tools in steering the economy.

Moreover, a fast capital account liberalisation entails the risk of financial crisis, as witnessed in South Korea and Mexico shortly after their respective financial openings. It is particularly risky to open too fast without a sound domestic financial sector and a well-developed capital market. Since financial and economic crisis could cause social unrest and political instability, capital account liberalisation can be expected to proceed very gradually — probably at a pace much slower than the PBC plan suggests.

Domestic financial reform is needed before China liberalises its capital account. Interest rate liberalisation and a freer exchange rate should be in place before a bold opening of the capital account, as speculative arbitrage on interest rate differentials and massive cross-border capital flows would jeopardise domestic financial stability. That said, a full convertibility is not likely any time soon, unless the Chinese government takes steps to accelerate domestic reforms. But the Chinese government is risk-averse, and there is no immediate pressure to liberalise the capital account — especially at a time of instability in the world economy and excessive global liquidity seeking returns in emerging economies.

Haihong Gao is Senior Fellow and a Research Director at the Institute of World Economics and Politics, Chinese Academy of Social Sciences.

Ulrich Volz is Senior Researcher at the German Development Institute (Deutsches Institut für Entwicklungspolitik), and Visiting Professor at the School of Economics, Peking University.

Comments are closed.

Support Quality Analysis

The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (

Copyright ©2024 East Asia Forum. All rights reserved.