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Opening China's Capital Account: Modeling the Capital Flow Response

Listed author(s):
  • James Laurenceson
  • Kam Ki Tang

Capital account convertibility in China is on the rise. In this paper we consider the impact that removing remaining capital controls might have on the volume of China's international capital flows. Better understanding of this capital flow response can shed light on China's current degree of international financial integration, which has important implications for policy decisions such as whether China should move toward a more flexible exchange rate regime. It is also relevant to discussing the financial stability consequences of removing remaining capital controls. The main finding is that China's capital account is already quite open, thus implying a tradeoff presently exists between exchange rate stability on the one hand and monetary independence on the other. In terms of financial stability, the results generally serve to allay fears that further opening the capital account would compromise China's international payments ability or disrupt global capital flows.

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Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 5 (2007)
Issue (Month): 1 ()
Pages: 1-18

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Handle: RePEc:taf:jocebs:v:5:y:2007:i:1:p:1-18
DOI: 10.1080/14765280601109196
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