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Facts, Risks and Management of Cross-Border Capital Flows
during China’s Capital Account Liberalization
Date:09.01.2022 Author:CF40

China’s short-term cross-border capital flows have retained distinctive features for decades. However, given the tough path to economic recovery and growing depreciation pressure on the renminbi, the impact of short-term capital flows on the country’s macroeconomic stability becomes increasingly prominent. How to assess the size of capital flows beyond available statistics and their impact on the macroeconomy? Does China still enjoy policy room for interest rate cuts?

To answer these questions and review a research project on related issues, CF40 held a Youth Forum titled Facts, Risks and Management of Cross-border Capital Flows during China’s Capital Account Liberalization on Sept 1. The research project was led by Zhang Bin, CF40 Non-resident Senior Fellow and Deputy Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS); and Xiao Lisheng, CF40 Youth Forum Member and Head of the Global Macroeconomy Research at the Institute of World Economics and Politics, CASS.

The seminar kicked off with keynote speeches by the two experts. Following the speech were reviews given by Zhang Xiaohui, CF40 Non-resident Senior Fellow and former Assistant Governor of PBC. Also attending the seminar were Qi Xiang, Director-General of Law and Regulation Department at CBIRC; Zhou Yongkun, Deputy Director of Macroprudential Policy Bureau at PBC; Zhou Yu, Deputy Director-General, International Department at PBC; Huo Yingli, Chairman of China Foreign Exchange Trade System; Cheng Manjiang, CEO of BOC International Research, among other regulators, financial practitioners and academics.

According to the discussions, China’s short-term capital flow is dominated by net outflows, being more volatile than that of many other economies. The situation is mainly caused by ‘other investments’ (i.e. non direct or securities investment) and also driven by exchange rate expectations and domestic economic conditions. The vast majority of cross-border capital flows under direct investment and securities investment are conducted through offshore financial centers (OFCs), mainly for tax avoidance, rent-seeking, overseas financing and wealth transfer. Given China’s strict control of capital outflows, securities held by OFCs have become a new means of hiding wealth.

Experts at the seminar came up with five policy recommendations for short-term capital flow management. First, exchange rate flexibility should be allowed to eliminate the expectation of one-way renminbi fluctuations. Second, a high level of economic prosperity at home can help mitigate the pressure of capital outflow. Third, it is essential to strengthen supervision over round-trip investments and companies listed abroad. Fourth, efforts should be stepped up to guide the hidden wealth to transfer back home. Fifth, institutional norms and response mechanisms should be improved against hidden risks that may lead to capital flight.

The seminar was moderated by Cheng Lian, CF40 Guest Member and Research Fellow at Institute of Finance and Banking at CASS.