A speech delivered by Chinese central bank governor Zhou Xiaochuan in 2012 on the issue of China’s capital account convertibility has risen to the fore once more in the domestic press, following its reprint by both the state-owned Xinhua News Agency and the official news publication of the State Administration of Foreign Exchange on the final Friday of 2017.
Below is a translation of Zhou Xiaochuan’s speech on the topic of “The Concept and Contents of Advancing Capital Account Convertibility” (推进资本项目可兑换的概念与内容) delivered in December 2012 at the Sanya Forum.
1. Seizing the opportunity and pace for reform
The Chinese Communist Party’s 18th National Congress report clearly referred to the need to “gradually achieve renminbi capital account convertibility.” This sentence has been included in the 12th Five Year Plan, and is a key mission for our upcoming work. When reference is made in official documents to achieving renminbi capital account convertibility, it is regularly adorned with the words “gradual,” but in different contexts the significance of this term will often vary. When we are further away from convertibility, reference to “gradual’ firstly means passing through a long period of time, and being able to achieve the goal following various forms of hard work. It secondly means emphasising the need to do what’s easy first and what’s difficult subsequently, performing comparisons of the benefits and disadvantages of various aspects of convertibility, and first advancing those that have “large benefits and small disadvantages, without the necessity for comprehensive promotion.
After we have worked hard and the distance from convertibility becomes smaller and smaller, reference to “gradual” will more heavily emphasise the need to achieve this goal, because those tasks that are easier to promote and better to undertake have almost been completed, leaving those comparatively complex and difficult areas that aren’t so easy to advance, and at this point cannot be avoided. Certain areas cannot be be clearly determined as involving “big benefits and small disadvantages,” and we may even have to pay a certain price during the process of implementation, but they must be implemented all the same.
Allow me to take the example of China’s ascension to the WTO as an example in order to clarify. The WTO was formally established in 1994, and its predecessor was the General Agreement on Trade and Tariffs (GATT) established in 1948. Prior to joining the WTO in 2001, China has implemented reform and liberalisation for more than two decades, continually upholding the strategy of “the easy first and the difficult subsequently,” which is to first undertake that with “major benefits and small disadvantages.” At the outset of reforms, capital was lacking, and the “benefit” of introducing foreign capital was more apparent. For this reason in 1979 the “Sino-Foreign Joint-venture Law” (中外合资企业法) was promulgated. By the final stage of WTO negotiations in 1999, many of the conditions for joining the WTO had been satisfied, and the relevant work was also quite detailed, eventually requiring a brisk clean up, and seeing which “hard bones” needed gnawing. At this time we discovered that while it wasn’t so easy to accurately reach conclusions on the comparative benefits and disadvantages of the several remaining areas, we still needed to assail these difficult fortifications and remove barriers.
For this reason, when interpreting the line “gradually achieving renminbi capital account convertibility,” we must first note that although official documents have often used terms such as “gradual progress,” “stable progress” or “gradual implementation” for many years, at present, with the distance from the goal is becoming increasingly near, and calls for internationalisation of the renminbi becoming louder, while there is still a gradual process of advancement for the next stage of work, the relevant work plan and its implementation will be more detailed and comprehensive.
Changes to China’s reference to renminbi convertibility also reflect a deepening understanding of this issue domestically. In 1993 at the 3rd Plenary Session of the 14th CCP Central Committee, party documents made reference for the first time to the transformation of the renminbi into a convertible currency. During the implementation of subsequent exchange reforms in 1994, we implemented an exchange rate system, launched a unified and managed floating exchange rate regime, and as well as announced the implementation of renminbi current account convertibility, excluding “san zi” enterprises.
In December 1996, China officially announced that it would abide by Article 8 of the International Monetary Fund and implement renminbi current account convertibility. Subsequently, relevant documents began to make reference to the need to gradually implement renminbi capital account convertibility. However, advancing renminbi capital account convertibility involves more complex work, as well as various interrelated reforms, and there has been continuous dispute over the matter.
A primary area of dispute is differences of opinion in relative benefits and disadvantages. Some people perhaps are not too concerned themselves with this area of reform, while the various individuals who concerned with this reform find it difficult to achieve full consensus. When it comes to specific issue, one group of people will often consider the benefits to be great and the disadvantages minor, requiring hasty action, while another group will firmly believe that the disadvantages are great and the benefits minor, and progress needs to be measured.
At times the disputes not only involved different points of view on relative benefits and disadvantages, but different opinions on the entire issue. The reason is that when people analyse problems and perform comparisons of benefits and disadvantages, the theories and experiences that serve as their basis will differ.
The Great Financial Crisis also brought new disputes. Western developed nations have always emphasised the free market economic system and external opening, which includes an emphasis on freely convertible currencies. At it is precise these nations which have become the source of the Great Financial Crisis. This has prompted the whole world to review the lessons provided by the crisis, and naturally led to questioning of whether the set of models and experiences advocated by Western countries are correct.
The Asian Financial Crisis at the end of the last century and the recent Great Financial Crisis have also caused the pace of implementation of renminbi capital account convertibility to slow, and even stop completely during the interim. It can be said that during crisis, dealing with crisis becomes the core mission. At the same time we also need to summarise and draw lessons from crisis, and reiterate certain viewpoints. The Asian Financial Crisis began to spread in the second half of 1997, and for some time afterwards China no longer emphasised advancing renminbi capital account convertibility. The matter wasn’t mentioned against until the 16th National CCP Congress in 2002, and then at the 3rd Plenary Session of the 16th CCP Central Committee in 2003, which again pointed to the need for gradual implementation of renminbi capital account convertibility.
By the time of the 17th National CCP Congress in 2007, the US sub-prime mortgage crisis was just beginning to intensify and evolve, and subsequent onset and continuous development of the financial crisis significantly diverted our attention away from promoting several key areas of reform. At the same time the Great Financial Crisis has caused people to become aware that several problems which concerned us in the past need to be re-examined and considered. Against this background, the schedule for renminbi capital account convertibility reforms has eased.
Despite the existence of these disputes, it should be said that renminbi capital account convertibility is an indispensable part of China’s further deepening of reform and opening, and improvements to the socialist market economic system. It should be gradually implemented based on conditions and decisions based on benefits and disadvantages.
2. The importance of currency convertibility
Resource allocation and convertibility
Firstly, capital account convertibility is closely tied to the establishment of a socialist market economic system. During the past 19 years of reform and opening, the relevant key documents of the central government have made a number of summaries and interpretations of the socialist market economic system. In 1992 the CCP’s 14th National Congress established the goal for China’s economic system reform of establishing and improving upon a socialist market economic system, while also providing two interpretations on the basis of preceding relevant documents. The first emphasised the need to establish a market economic under macro-controls and adjustments, and not a completely laissez-faire free -market economy. The second was emphasising the fundamental role of the market in resource allocation.
Reference to the fundamental role of the market during resource allocation simply means that the prices of various commodities, factors of production (including capital and labour) and services should all be determined by market supply and demand, as well as allocated. obviously, foreign exchange involves a market allocation issue. For this reason, applying this line to the realm of foreign exchange management can be outlined as follows: the foreign exchange market must play a fundamental role with respect to the allocation of foreign exchange resources, and determining the exchange rate of the renminbi. This is to say that supply and demand must be balanced on the basis of market supply and demand relationships and price mechanisms. Better employing the fundamental role of the market in the allocation of foreign exchange resources means refraining from the application of needless restrictions that are extraneous to foreign exchange market supply and demand relationships. In the past we have applied many restrictions with respect to foreign exchange management – not just capital account restrictions, but also current account restrictions, and the next step will be to enable the market to play a fundamental role, which will involve gradually reducing these restrictions, and reducing them to the point where we have achieved renminbi convertibility for both accounts. For this reason, free convertibility of the renminbi and the establishing and improvement of the socialist market system are tied together.
Changes to resource allocation methods involve adjustments to incentive mechanisms and relationships of interest. Looking back on the reform process it isn’t hard to see that the socialist market economy and the preceding traditional centralised command economy are two completely different models, and disputes and frictions will arise during the process of model transitioning, necessitating significant shifts in terms of thought. At the end of the 1970’s and the start of the 1980’s, people were already quite unanimous in their understanding of the defects of the traditional centralised planned economy, and one key area of reform strategy was the decentralisation of authority to spur the activity of economic entities. In the villages were introduced the household-responsiblity system, to spur the productivity of the farmers. At the same time we delegated authority and ceded profits for state-owned enterprises, increasing their independence, with the same goal of spurring their activity. However during the early stage of reforms, there were always contradictions in terms of ideology, being the desire to spur the activity of people, without being willing to advance price reforms. This was because the reform of the pricing system would trigger a series of adjustments to interests, as well as cause price inflation. In actuality, incentive mechanisms and resource allocation are two sides of the same issue: we look at the resource allocation issue from the perspective of price formation, and we look at the issue of incentive mechanisms from the perspective of allocation. For this reason, if we were unwilling to reform price mechanisms, resource allocation would inevitably become distorted. At the outset of reforms, this contradiction wasn’t that pronounced, and under circumstances where major reforms of price mechanisms hadn’t yet been implemented, it will still possible to significantly spur human productivity via reforms in other areas. Of course, detailed analysis will determine that during the process of advancing such reforms, in actuality price mechanisms had become loosened, and in certain areas the price control system began to gradually dismantle. For example, when the household-responsibility system was introduced to the villages, the prices for many agricultural commodities were liberalised at rural trade fairs.
With respect to the issue of renminbi convertibility, there exist classic contradictions we know from the early phase of reform: this is the desire to raise the efficiency of resource allocation via reform, while also hoping to minimise disruption to pricing mechanisms, and refrain from adjusting or only moderately adjusting existing interests. The renminbi’s overseas price is the exchange rate, and for this reason the issue of renminbi convertibility involves the renminbi exchange rate and foreign exchange market, and requires that the renminbi exchange rate formation mechanism and foreign exchange markets enable the market to play a fundamental role during the allocation of foreign exchange resources. In certain countries and regions, exchange rate reforms have brought inflationary pressures, and it’s been a good thing that the renminbi exchange rate has showed an appreciation trend over the past several years, playing the role of curbing inflation. Despite this, renminbi convertibility and exchange rate reforms still unavoidably involve adjustments to various relationships of interest.
In summary, when comparing the benefits and disadvantages of renminbi capital account convertibility, in addition to needing to assess in detail the impact upon various sectors (such as textiles) and regions (such as eastern China, central China, western China and Hong Kong, Macau and Taiwan) we also need to take a more macro-perspective and a higher vantage point, when it comes to understanding and implementing the proposition that the market play a fundamental role in resource allocation.
An open economy and convertibility
A the end of the 1970’s and the start of the 1980’s China began to advance external opening, and encouraged overseas companies to make direct investments. However, at that time we did not make reference to the term “open economy.” Documents from the 3rd Plenary Session of the 14th CCP Central Committee in 1993 proposed 50 frameworks in relation to establishing and improving upon a socialist market economy, and clearly incorporated reference to an “open economy,” emphasising that China would no longer be a closed economy, and needed to establish an open socialist market economy. The issue that needs to be examined is whether or not there is a relationship between establishing an open economy and the issue of renminbi convertibility, or in other words, whether or not it is possible to establish an open economy while refraining from advancing renminbi convertibility over the long-term. Are there precedents for this in the world?
We should reflect a little upon the source of the terms “open economy” and “closed economy.” At the end of the 1970’s and the start of the 1980’s, there was intense debate amongst development economists on the issue of economic development models. The crux of the debate involved two terms. One was the “export-oriented development strategy,” subsequently changed by the World Bank to “outward-looking development strategy,” which in the realm of economic nomenclature is similar to open economy. The other was the “inward-looking development strategy,” which was distinguished by the import-substitution development strategy, and primarily involved the organisation of domestic production of goods that needed to be imported to the greatest extent possible, in order to replace imports. In economic terms this is the same as an inward-looking economy or closed economy.
Latin America is the classic example of this. During this debate over open economies and closed economies, people naturally viewed the traditional centralised planned economy as a closed economy, yet this distinction was in fact not so accurate, because the former Soviet Union and Eastern Bloc countries had established a cooperative system in the form of the Council for Mutual Economic Assistance, so that an open economic system existed amongst themselves. It was just the case that these countries used planning to achieve cross-border division of labour and exchange.
There is a difference between an “open economy” and “external opening,” just as there is a difference between a “market economy” and a “market.” There are many countries in the world that use the term “external opening,” for example many African countries have made reference to external opening, but a number of them do not make reference to an “open economy,” and instead use other terms. Tracing the source of matters based on the above, the term “open economy” has another significance.
Looking at China’s situation, comparing circumstances in 1985 with 1980, or the start of the 1990’s with the 1980’s, can we say that they were more “open?” Were they examples of an “open economy?” Perhaps we still need to consider this. So when the 3rd Plenary Session of the 14th CCP Central Committee made reference to the need to establish an open economy, it in actuality established a new economic reform and development mentality at a conceptual level. Returning to look at things from the perspective of renminbi convertibility, and examining things from the perspective of establishing an open economy, if the renminbi isn’t convertible, it’s very difficult to satisfy the definition of an open economy. If China as a major economy wants to establish an open economy it will undoubtedly involve a long process, and achieving renminbi convertibility will leo require a long process. However, if we want to establish a comparatively sound open economy, renminbi convertibility is a necessity.
Convertibility of the renminbi current account is the most fundamental part of this, and was accomplished by China in 1996. The next step is promoting and achieving renminbi capital account convertibility, which is both necessary for China’s establishment of an open economy, as well as extremely important itself. 20 years have already passed since China first made reference to establishing an open economy until now, and advancing renminbi capital account convertibility is also gradually becoming more urgent. We need to acknowledge the close tie between these two work areas.
Renminbi internationalisation and convertibility
In recent years one topic which has received broad attention has been the cross-border use of the renminbi for trade and investment. The People’s Bank of China does not strongly advocate the use of the term “renminbi internationalisation,” but its use is already commonplace abroad. Renminbi cross-border usage and its expansion is to a very large extent the result of the Great Financial Crisis. During the crisis, many countries starting with South Korean proposed the establishment of currency swaps with China. Additionally, following the appreciation of the renminbi, enterprises and individuals at the micro-economic level also needed to use the currency for cross-border purposes. During the crisis the value of reserve currencies or international currencies was unstable, and the monetary policy of countries that issue reserve currencies was fraught with dispute.
Some people directly accused them of failing to bear their responsibilities, and said that relying on those unstable currencies was a poorer option directly using their own currencies. It may be said that these factors created an historic opportunity for the renminbi to “expand abroad,” generating demand for cross-border usage of the renminbi. However, a natural problem is under conditions where the capital account isn’t freely convertible, can the renminbi be truly widely accepted internationally? In terms of basic theory and international experience, under conditions where the renminbi isn’t freely convertible, cross-border usage of the renminbi can achieve significant development, but it is impossible for it to achieve sustained, long-term growth, and its level of international acceptance cannot be very high. Under these circumstances, gradually implementing renminbi capital account convertibility is the necessary choice.
In summary, “gradual implementation of renminbi capital account convertibility” has been written into the 18th National CCP Congress Report, as well as been written into several preceding official central government documents. There are still various disputes surrounding the implementation process. There are some people who believe that capital account convertibility is something learned from the West or is acceding to Western demands, and does not suit China’s national conditions, and implement ion is very likely to bring greater disadvantages than merits. For this reason they do not endorse promotion of this task. We can see that there are still certain problems of comprehension that need to be resolved in relation to this task, and that discussion and clarification is still required with respect to certain erroneous understandings.
3. The threshold for capital account convertibility
Is there a clearly defined threshold?
When discussing whether or not the time is ripe for reform, or the formulation of specific policies, there are people who lack clarity with respect to the concept of capital account convertibility. At present there is still not authoritative definition of capital account convertibility. One of the key responsibilities of the IMF is the supervision and regulation of exchange rate mechanisms and international capital flows, and they should have the greatest authority for defining currency convertibility. However the IMF does not have a strict definition of capital account convertibility, and does not even have specific provisions in this regard.
The IMF’s Article 8 clearly defines current account convertibility, stipulating a series of conditions that countries can check in succession. If they satisfy these provisions, then they can declare that they have achieved current account convertibility.
In comparison, the IMF has only provided a general framework for capital account convertibility, and has not yet stipulated a set of conditions which once accepted would permit the declaration of capital account convertibility. It’s also because of this that certain countries have in fact not actually achieved free convertibility of their capital accounts in the general sense, but have still declared externally that they have achieved capital account convertibility. Why do some countries that have not met benchmarks still declare in advance that they have satisfied them, while other countries are extremely cautious in this regard? This is because the national circumstances of each country are different. Some countries urgently need to introduce foreign capital, and will declare capital account convertibility in advance to raise their capital to overseas funds. There are also some countries that are switching gears, such as the former Soviet Union and some countries in Eastern Europe, who are eager to declare capital account convertibility primarily because they want to indicate that they have fully converted into market economies, and this can strengthen international and domestic confidence.
There are also some countries whose economic development conditions aren’t that great, and whose level of openness isn’t that high, and who are still very far from achieving capital account convertibility. They have made declarations in advance with the goal of accelerating the progress of opening and expediting development. For example Russia joined the WTO in 2012, ten years after China, but in 2006 is had already declared that it had achieved capital account convertibility. We can see that there are clearly no set benchmarks for capital account convertibility.
Another challenge for understanding the concept of capital account convertibility lies in the fact that the further away from convertibility we are, the clearer the concept becomes. The closer we are, the more specific decisions we face, and the concept becomes more vague. To take an example, if you drive a car from Beijing to Hainan, just after setting off you only need to remember to go south and you’ll be fine, and the specific route you take doesn’t matter much. However, once you are closer, you need to make choices, because you need to determine where you can take the very, and which city you’re intact travelling to. For this reason, the closer we are to convertibility, the more complex the concept becomes, so we need proper clarification.
With respect to capital account convertibility, the IMF has a table including seven main categories and 40 items. These items are broken down from a technical perspective, and the table can serve as a comparative document, but the table does not differentiate the importance of each item. For a vague benchmark as to whether or not capital account convertibility has been achieved we can look at whether most of the key the seven main categories and the forty items have been achieved. If they’ve been completed, then we can consider this to be capital account convertibility.
Is there such a thing as the “four in one?”
It’s precisely because there are no clear standards that it’s easy for certain problems to arise during discussions. During domestic discussion of capital account convertibility, we often hear the concept of “four in one” (四位一体), which means equating capital account convertibility and a fully free floating renminbi exchange rate, the removal of capital controls, the complete opening of financial markets and the internationalisation of the renminbi. According to this viewpoint once the renminbi capital count is made convertible, this could mean that:
Firstly, the renminbi exchange rate should be completely free floating, with no additional form of interference whatsoever.
Secondly, complete removal of all controls on capital flows, and that cross-border capital inflows and outflows should be 100% free, with no further controls.
Thirdly, domestic financial markets are completely open to the outside. International capital will be able to freely enter and withdraw from various financial markets, freely purchase and sell Chinese shares, bonds, funds and various financial derivatives, freely engage in financial operations including banking, securities, insurance, trust and financial leasing.
Fourthly, the internationalisation of our currency, and its emergence as a reserve currency.
During discussions, many people confuse these several concepts, and once they make reference to renminbi capital account convertibility or the issue of free conversion, extend the concept of “freely” to several other concepts, believe that these areas are linked together with renminbi capital account convertibility. For this reason while the renminbi exchange rate is not yet fully free floating and there are still controls on capital flows, and while our financial markets are not fully open and our currency has not yet become an international currency, it is not possible to truly make the renminbi capital account freely convertible.
There are several problems with this interpretation, which can lead to us setting out work targets too high and too distant, increasing the difficulty of renminbi capital account convertibility. During the comparison of benefits and advantages, it can also lead to us including calculations of the various defects and costs brought by complete opening of domestic financial markets, thus exacerbating disputes, which is inimical to the advancement of work. For this reason the People’s Bank of China has often undertaken the work of providing explanations to various departments and local governments.
Convertibility and exchange rate mechanisms
What is the relationship between the two? I will firstly use the examples of the Swiss franc and the Japanese yen as an example. In 2011 during problems with the US debt ceiling, the US dollar became week, causing the Japanese yen and the Swiss franc to appreciate very quickly. The Swiss franc to US dollar exchange rate had for a long been at around the 1.2:1 level, and subsequently saw some appreciation but not much volatility. Once the US dollar weakened in 2011, however, the Swiss franc rapidly appreciation, reaching 0.8:1 at its peak, causing a major shock to the Swiss economy. Switzerland is a small free market economy, and the Swiss franc is also an important international currency, yet under these circumstances Switzerland also intervened in the exchange rate, causing it to eventually stabilise at a level of 1.2:1 against the Euro.
Similar to Switzerland, Japan also intervened in the yen exchange rate. While the Swiss franc and the Japanese yuan are freely convertible currencies, this does not mean however that their exchange rates need to be completely free floating, and that there can be no form of interference.
Another example is that Hong Kong implements a linked exchange rate pegged to the US dollar, and while the Hong Kong dollar obviously doesn’t have a free floating exchange rate, it is nonetheless one of the world’s most freely convertible currencies. Looking at things from this perspective, a free floating exchange rate and the free convertibility of a currency are significantly linked but not equivalent. A free floating exchange rate is not a fully necessary component of capital account convertibility. For this reason, when the renminbi exchange rate is roughly balanced in terms of supply and demand, if there are abnormal capital flows, we may still engage in certain interventions in the exchange rate.
Convertibility and capital flows
With respect to internationalisation of the renminbi, we can say that capital account convertibility and internationalisation of our currency are linked, but there is no necessary corresponding linkage. Internationally, the majority of small open economies have already announced the convertibility of their capital accounts, of which there are certainly a considerable number of countries whose openness is quite high, and whose currency convertibility is also quite high.
Aside from the Swiss franc however, the currencies of these countries are not international currencies, and this is mainly because their economic scale is too small. Conversely, while the renminbi capital account has not yet fully achieved free convertibility, renminbi cross-border usage has nonetheless achieved definite progress, and levels of acceptance in certain countries and regions are quite high.
This indicates that there is no necessary correspondence between convertibility and internationalisation of our currency. Of course, we must also acknowledge that if we want renminbi cross-border usage to achieve greater progress, we must gradually advance capital account convertibility.
4. China isn’t that far from its targets
Looking at international practices, capital account convertibility very rarely achieves 100% free convertibility, but free convertibility for a large volume of activity, and management of a small volume. It’s also not the case that many managed items do not permit convertibility – they instead require handling in accordance with relevant stipulations. At the very least, from the perspective of account opening and balance of payments statical requirements, it is necessary to explain issues in relation to the nature and usage of capital.
Many countries that have already achieved capital account convertibility continue to manage capital flows in several ways. In addition to the IMF work paper referred to above, which approves of the retention of systems for restricting speculative short-term capital inflows, IMF President Lagarde has recently said that under circumstances where there are abnormal capital flows, emerging economies must impose restrictions on some capital flows. Additionally, the formal IMF document also approves of countries that have achieve capital account convertibility to adopt provisional capital flow restriction measures when crisis occurs. During the Asian Financial Crisis Malaysia adopted provision controls on capital flows, and subsequently relaxed them.
With reference to the IMF’s seven major categories and 40 items for capital account convertibility, China isn’t that far at all from the goal of convertibility. In the IMF scheme, financial tools primarily include the six categories of stocks, bonds, money market instruments, funds, derivatives and loans, of which the first five items are divided into the four categories of resident, non-resident, financial instrument transaction and issuance, with four times five equally twenty.
Loans are further divided into the three sub-categories of commercial loans, financial loans and warranties and reserve financing facility, with each category divided into resident and on-resident.
These main items account for 26 in total. During actual management however, it is occasionally difficult to achieve a one-to-one division. For example, if we allow China’s qualified investors to engage in overseas investment, once funds leave, irrespective of whether they are invested in stocks, bonds, funds, derivatives or other products, the feasibility and necessity of division isn’t large. So once the decision is made to implement certain policies, they can involve a very large number of items.
In summary, if we carefully comb through the seven major categories and forty items of the IMF, we will discover that China’s level of convertibility is already quite high, and our distance from the goal isn’t that far.
5. Strengthening supervision and necessary management of capital flows
Following conceptual clarification, specific work becomes easy to undertake. We firstly need to closely monitor cross-border capital flows. At present China has already implemented current account convertibility, yet the capital account has not yet been fully opened, so there needs to be strict separation of the current account and capital account during actual work.
Transactions under the capital account must pass through statuary administrative procedures, with some requiring assessment and approval. Yet we must understand that given differences in procedural administration and strengthening of monitoring, if international capital dodges controls during entry or exit via various channels, this is very difficult to uncover at the regulatory level. Strengthening monitoring emphasises pragmatically grasping information on capital flows.
With respect to how whether or not to manage or control and how to manage or control, decisions may be made based on circumstances. For example certain control measures may be adopted with respect to short-term speculative capital.
Monitoring is the foundation for all aspects of work, and we only need to have effective monitoring in order to be able to achieve our goals when it comes to implementation of management and control.
Otherwise, if monitoring isn’t adequate, it can be very difficult to determine at which location or which link there are problems such as monitoring.
With respect to China’s monitoring in future, we both need to make it more convenient, so that relevant monitoring does not cause too much inconvenience for regular economic activity, while we also need to grasp information on fund inflows and outflows and exchanges, in order to make it easier to promptly handle problems once they arise.
Secondly, we need to improve macro-prudential management, and may implement additional monitoring and regulatory measures with respect to currency misallocations and excess external debt problems that can arise on currency markets, as well as problems with transactions on financial derivatives markets. We especially need to focus on the usage of macro-prudential policies for regulation.
Thirdly, we should strengthen management of short-term capital flows. Looking at existing management and control measures, at present China uses the QFII system to regulate inflows of foreign funds into the stock market and bond market. “Q” refers to “qualified,” and emphasises the compliance of offshore investors, primarily providing access to funds for medium and long-term investment. For this reason the QFII system clearly indicates that we are not so welcoming towards short-term speculative capital inflows.
The abrupt withdrawal of foreign capital often creates a marked shock for emerging markets, so we need to impose order upon capital withdrawal. With respect to foreign direct investment, China has always held a welcoming attitude.
In addition to this, we need to continue to strengthen relevant policies and measures against money-laundering and terrorist financing, and focus on the use of tax havens to engage in cross-border transactions for tax-avoidance purposes.
In these areas, we can make reference to international methods to strengthen regulation and control.
Finally, if financial crisis or economic crisis occurs, we can make reference to IMF provisions to adopt provisional regulatory measures with respect to capital flows.
In summary, by means of the above measures, we can say that we have greatly reduced concerns and doubts in relation to advancing renminbi capital account convertibility, which is of benefit to reaching conclusions on benefits and disadvantages.
6. In the near term we need to promote specific items
Overall, although use of the term “gradual” hasn’t undergone change, in actuality we have already reached the stage where we need to formulate plans in greater detail as well as adopt reform steps, as well as resolutely pursue further progress and implementation.
It must be understood that many renminbi convertibility for many items under the capital account has already been achieved, and that remaining items are hardly numerous.
With respect to these items we need to engage in step-by-step research and formulation of corresponding measures, and decide how to advance and progress to what extent.
By means of meticulous planning, it will be fully possible to accelerate the proper performance of all work for accelerating the realisation of renminbi capital account convertibility, and complete this mission as proposed by the 18th National CCP Congress.
With respect to future work, there remains a large volume of specific matters that need to be advanced, and the following several areas would be quite important.
Firstly, we need to implement a change in thought, and this involves several problems in relation to understanding and system design, including the concept of capital account convertibility and comparisons of benefits and disadvantages.
Secondly, for several key items, including expansion of international stock exchange links, Panda bonds and QDII, we need to establish related systems, and achieve managed convertibility.
Thirdly, we should amend relevant laws and regulations. With respect to laws and regulations in relation to areas including foreign exchange management and cross-border investment, we need to engage in further scrutiny, amendment and improvement, and of course, this process will require spending considerable time.
Additionally, we should change supervisory and regulatory methods as soon as possible, and make greater use of modern methods, reduce administration examinations and approvals and raise monitoring efficiency.
Fourthly, the implementation of specific capital account convertibility policies involves different authorities and departments, and requires the strengthening of cross-departmental communications and coordination. The financial system must service the real economy, and opening of the capital account also requires that we effectively uphold the spirit of servicing the real economy. An example of this is that during the initial phase of cross-border renminbi usage, the financial regulatory and export rebate departments engage in effective coordination for the convenience of enterprise.
In summary, there are still some specific capital account convertibility items that we need to steadily advance. Since we have already confirmed the goal of achieving capital account convertibility, we should follow the contents of this document, and in particular need to communication well with those in the economic and financial spheres, as well as hope that those in the economic and financial spheres will communicate well with the public, and that China can engage in strong international communication.
This is in fact means moving towards high-level external opening, more vigorous seizing of opportunities during the process of globalisation, and better, tighter integration with common global development.
At the same time capital account convertibility involves many specific policy adjustments, and the completion of these adjustments will cause the market to play an even greater fundamental role in resource allocation, as well as bring greater convenience to many activities in the real economy, in particular trade, investment, financial transactions, tourism, and merger and acquisitions.
This is in consonance with the direction and missions of the 18th National CCP Congress.
