Chinese savers can change the world
Opinion: Beijing needs to reform before opening national savings of $5 trillion to the world
The People’s Bank of China has argued that an open capital account would improve the quality of Chinese foreign assets, promote cross-border use of the renminbi and help the country’s enterprises restructure. Photograph: Reuters/Petar Kujundzic
This year China’s gross national savings will be close to $5 trillion. US savings will be only $3 trillion. If, as planned, China were to open its capital account – allowing foreigners to invest in China and the Chinese to invest abroad – the scale of its savings would surely reshape global finance. Done well, liberalisation would bring huge changes. Done badly, it could shake the foundations of already fragile global finance.
China’s closed capital account brings an important benefit both to the country itself and to the world. It makes it relatively simple for Beijing to manage domestic financial shocks. A severe and unexpected Chinese slowdown would be a big event but at least the spillover to the financial systems of the rest of the world would be relatively minor.
If the capital account were to be opened, that would change: any crises might become more difficult to manage and their impact on the rest of the world’s financial system would also be far greater. If, in the long run, Chinese entities became the world’s largest owners of financial assets, any big shock within China would become a global event, just as the Great Depression of the 1930s and the Great Recession of the 2000s in the US shook the world economy.
In a document published in 2012, the People’s Bank of China argued that an open capital account would improve the quality of Chinese foreign assets, promote cross-border use of the renminbi and help the country’s enterprises restructure. Moreover, it insisted, capital controls were becoming ineffective. In addition, it suggested that “China would not face big risks” if it opened the capital account, since the assets and liabilities of banks were denominated in renminbi, short-term debt was a small proportion of China’s foreign debts and risks in the domestic property and capital markets were manageable.
Pride may go before a fall. As we have seen many times, the quality of balance sheets can deteriorate frighteningly quickly, particularly if unfamiliar opportunities and players enter the domestic markets. In 1998 Stanley Fischer, then first deputy managing director of the IMF, argued that the preconditions for successful capital account liberalisation were a stable macroeconomic environment, a sound banking system and developed financial markets. China certainly lacks the third. Whether it has the second is very much open to debate and so, for this reason, is the first. Given the risks of capital account liberalisation, particularly in such a huge economy, the sensible view is that China is not yet ready.
The People’s Bank recognised this. It proposed dividing the task into three periods. In the first three years, controls on foreign direct investment by enterprises would be relaxed. Over three to five years, the aim would be to relax controls on trade-related credit and spur internationalisation of the renminbi. Over five to 10 years, the plan was to open up capital inflows before outflows. The People’s Bank planned to leave personal transactions, money-market instruments and derivatives to the end. It also wished to rule out (hard-to-define) speculative transactions indefinitely.