Free exchange

Glorious and arduous

Is China’s great wall of capital controls keeping money in or out?

AT ITS recent mid-year meeting, China’s State Administration of Foreign Exchange (SAFE), which helps to regulate the flow of capital across the country’s borders, weighed the task ahead. China is committed to making its currency, the yuan, fully convertible, relaxing the controls that keep foreign money out and domestic money in. A plan is expected this year. At its meeting, SAFE concluded that the next phase of foreign-exchange management will be “glorious and arduous”. It will certainly be the latter.

China first promised to make the yuan fully convertible in 1993, setting the end of that decade as a deadline. Back then the Asian financial crisis helped undermine the case for quick and early capital-account liberalisation. But China’s peculiarities have also reduced the sense of urgency. Most emerging economies relaxed capital controls because they wanted to invite money in. By importing foreign capital, poor countries could invest more than they themselves could afford to save.

But China already saves more than it invests – and invests more than it probably should. In China the case for liberalisation is more subtle. In a report on China’s economy, published last month, the International Monetary Fund (IMF) argued that a gradual liberalisation of capital flows would improve the efficiency of investment (as opposed to the quantity).

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