By Simon Rabinovitch in Beijing and Robert Cookson in Hong Kong
Chinese reformers have called for the dismantling of one of the last and biggest walls that cloisters their giant economy from the rest of the world.
A three-step plan published by the Chinese central bank is the most detailed public proposal yet for loosening the government’s strict capital controls. If implemented as envisaged, the global economic landscape will undergo sweeping changes this decade.
Foreign investors will be much bigger players in Chinese stock and bond markets, which are now largely closed to them. The renminbi will take on a bigger international role, eating into the dollar’s dominant position. Chinese companies will buy up far more of their American and European peers which have been weakened by the global financial crisis.
But whether the reforms can in fact be implemented as envisaged is the big question. While reformers are pressing for faster change ahead of a once-in-a-decade leadership transition this year, that transition itself is expected to put sand in the gears of the political system, with officials prizing policy stability amid big personnel changes.
“If you think about the political reality, I don’t think that financial market liberalisation will happen in a big bang,” said Zhu Haibin, an economist with JP Morgan.
It is not the first time that capital account liberalisation has been discussed in Beijing. Deng Xiaoping, the leader who set China on its path from Maoism towards a free market, said in 1993 that gradually allowing the renminbi to become a convertible currency was a crucial objective.
Gradual has been the operative word since then. Even as China has flung its doors open to global trade, it has erected vast roadblocks to stymie capital flows. In one indication of the glacial pace of opening, foreign banks manage less than 2 per cent of the assets in the country’s financial system.
China’s capital controls have served it well. It was little harmed by the Asian financial crisis of 1997-98 and has been largely insulated from the global tumult of the past four years. That resilience in the face of external trouble has emboldened conservatives in Beijing who support the status quo.
But there are also problems in maintaining such rigid capital controls. Chinese savers have few investment outlets for their money and plough it into the property market instead. Perhaps most important from a political standpoint, plans to transform the renminbi into a rival to the dollar have run into difficulty – foreign companies do not want a currency that cannot be invested in its country of origin.
“Internationalisation of the renminbi is now a clear mandate, so resistance for capital account liberalisation has been diminishing,” said Liu Li-gang, an economist with ANZ. “The wind has shifted.”
China’s top leaders have given a series of signals in recent months that they want capital account reforms to get into gear.
Li Keqiang, the man likely to succeed Wen Jiabao as premier later this year, visited Hong Kong last August and pledged to do more to build it into an offshore market for the renminbi. Then in January, the country’s central planning agency published a roadmap for turning Shanghai into a global financial centre, something that can only be achieved with much more openness to capital flows.
Finally, earlier this month, Mr Wen reached for a quote from Deng Xiaoping, the original arch-reformer, that encouraged those wanting change: “Opening up and reform should be implemented unswervingly, or there will only be a dead end.”
Yet reform, when it comes, will not be radical.
The proposal from the central bank was cautious. It was not written by the bank’s governor, nor was it published on its official website. Instead, the author was Sheng Songcheng, head of the bank’s statistics department, and it was printed in a newspaper managed by Xinhua, the state news agency.
The central bank was also careful not to push the envelope in its timeline for reform. It will be five years before Beijing reaches the stage in the plan where it opens its stock and bond markets more widely to foreigners. As for making the renminbi fully convertible, that was declared to be “the final step” and no deadline was set for it.
That the strongest voice for reform in China is still so cautious may be a disappointment to those wanting the country to open up more quickly.
But Louis Kuijs, a former World Bank economist in Beijing, noted that a common thread in financial crises in emerging markets over the past two decades had been excessive haste in allowing the free flow of money across borders.
“As someone who is wary of the risks of opening up the capital account, China’s approach makes a lot of sense,” he said.
Copyright The Financial Times Limited 2012