The reform of the renminbi (RMB) exchange-rate mechanism has gradually matured, the “global-going capital” has accelerated RMB internationalization and IMF has considered of including the RMB into the SDR basket. As a result of all these, the opening of its capital account will become an important variant in the globalization process of Chinese finance.
As recently expressed by Zhang Xinjin, president of the Shanghai branch under China’s central bank, the Shanghai Free Trade Zone was the first that made technical preparation for a comprehensive realization of a convertible RMB, making another important step towards the opening of Chinese capital. After the global financial crisis, China has been actively promoting the opening of capital accounts. The demand for Chinese capital has been much greater than expected in recent years in particular.
The renminbi’s payment value has increased rapidly. China’s central bank is committed to realizing marketization of the RMB exchange rate within two years and has constantly pushed forward RMB bilateral swaps with more countries. According to the data from SWIFT（Society for Worldwide Interbank Financial Telecommunications）, the renminbi is now the second-most-used currency in world trade financing and is the fifth-most-used trade currency in the world. From the perspective of liquidity, China’s central bank has signed bilateral currency-swap agreements with more than 20 countries. Offshore RMB deposits total over ￥2 trillion, and offshore RMB-denominated bonds and other RMB capital markets have been booming, giving a new urgency for convertible RMB capital accounts.
The renminbi has crossed the “threshold” of the SDR basket. According to IMF standards, the inclusion of currencies in the SDR basket first requires a consistency with the standards of those “major trading countries”, which is the currency-issuing country ranked in the world’s top five in goods and services export over the past five years. The second standard is “free use”, that is, the currency is widely used in international payment and is widely traded in the major exchange rate markets. Increasing the convertibility can both eliminate the technical barriers for the RMB to join the SDR and the demand of some countries for a convertible capital account. Thus, the opening of the capital account becomes a key factor in deciding whether the RMB can join the SDR.
Having shifted from a shortage of capital and foreign reserve into a surplus of capital and foreign reserve, and having comprehensively implemented a “One Belt and One Road” opening-up policy, China has become one of the world’s most important investors and capital exporters, stepping into a new phrase of “GNP” from “GDP” and reversing the mechanism of capital-free flow. So, it is imperative to speed up the opening of the capital account.
At present, a rough estimation tells that the openness of the Chinese capital account has reached 85%. The accounts without free convertibility mainly come from three areas: first, domestic operational institutions and private overseas direct investment; second, equity investment; third, debt-security investment. These three parts are under restrictions.
For the first part, China implements a policy of private overseas investment with “partial restriction and limited outflow”. China’s State Council suggests the establishment of a private overseas investment system, beneficial to adjusting and optimizing China’s external balance sheet. In the past, China mainly invested its foreign reserves into US bonds. Encouraging direct foreign investment not only helps China balance its trade but also helps China avoid the so-called risks of currency mismatch and capital gains and losses. The other two parts are of high leverage ratio and are difficult in risk management mainly because they are the domestic money market, trust market and trading derivatives not participated by the civilians. So, the world takes a cautious attitude towards these parts.
The point is that when the capital account is opened, China should comprehensively establish a risk-control frame for the opening capital account, following the principal of “a long-term opening before the short term opening and a direct opening before the indirect opening” so as to supervise the cross-border capital and manage the risk, which helps take the initiative in controlling capital flow.
First, supervise the risk of short-term capital flow. The high liquidity of the security investment in the short-term capital flow brings high market volatility; because short-term securities are of high uncertainty and debt service risk, whenever a big financial event or the US hikes interest rates, China should take temporary control measures in a well-targeted manner and with great efforts.
Second, supervise the key cross-border financing projects. To avoid the sharp increase of debt risk after the capital account is opened, the regulators need to strengthen the risk management rules of the cross-border financing scale, currency and maturities. The market can accordingly calculate the amount and structure of its cross-border financing on its own, which can effectively avoid the external debt expansion and currency mismatch to guard off a possible external debt crisis. It also must focus on supervising illegal capital, such as money laundering, terrorist financing and overuse of tax havens of the cross-border financial deals.
Finally, a fundamental way to deal with the risk of cross-border capital flow is to actively participate in the global financial management and rules making. It is also fundamental to actively promote the international exchange rate system, adjusting the system of international balance of payment and management of international capital flow as well as the reform and coordination of the international financial policies. This is an institutional framework to effectively avoid the risk of capital account opening at the global level.