China Moves Towards Opening the Capital Account

Some have noted that China has recently eased liquidity conditions and this is cited as the mini-stimulus growing larger. One counterpoint is made by a Chinese analyst in the article below: China's central bank is easing monetary policy heading into June to avoid another cash crunch.

This article from the Economic Observer goes into detail about China's capital account opening, which is picking up speed. It starts with some warnings from Andy Xie and Goldman Sachs. Xie warns that a fixed exchange rate and open capital account will increase arbitrage and asset bubble risk. Goldman warns of outflows of Chinese capital. The chief economist at Mizuho is worried about superimposed economic cycles.

Regarding that last point, in all the talk of a slowdown and potential for crisis, there hasn't been a lot of discussion about how the reforms will affect the economy. Interest rate liberalization, opening the capital account and currency reform are major policy steps occurring right as the economy may have peaked in the business cycle. The effect of these reforms will be pro-cyclical in some cases and counter-cyclical in others, but as the economists note, the government cannot do one step in isolation otherwise it risks an unbalanced result. It will have to adjust everything simultaneously and that will trigger major changes for China at an already critical momentum for the economy.


6月“钱荒”或无二至 资本账户开放舞动中国节奏

approaching June fluidity special point in time, that 15 percent of China's capital account opening is urgent exploratory open it?

From the "About publishing cross-border foreign exchange regulations guarantee" notice "the State Administration of Foreign Exchange (Hui Fa [2014] No. 29) to the central bank issued" China (Shanghai) split accounting business experimental implementation rules of free trade zones "," China (Shanghai) free trade zone split test prudent accounting business risk management rules, "the path leading to the yuan fully convertible capital account is coming.

Although China's central bank Shanghai headquarters, deputy director of the Shanghai Branch Zhang on May 22, said the free trade account is just a carrier, and tools; capital account liberalization, but the speed was truly happening.

Similarly, the SAFE official said, the 29th article of the basic guarantees to achieve a cross-border convertible. This suggests that "capital account convertibility a big step forward."

Independent economist Andy Xie told the Economic Observer reported, if fully open capital account, rather than a floating exchange rate, then arbitrage funds intensified, will lead to asset price bubbles inflated.

The latest report says Goldman Sachs, in the case of capital account liberalization, the scale of Chinese investment overseas funds will likely increase $ 6 trillion; capital outflow may gradually in batches.

Easy to see that the central bank today, after the Spring Festival is trying to give space for exchange rate flexibility, an arbitrageur combat, control liquidity; two warm-up capital can be described as an open project, trying to do the matching policy.

However, the supporting monetary policy alone is not enough it seems "coverage" China is gradually entering the risk of economic superimposed cycles. "This is really worrying, recent new policy in the financial sector a lot, but it is difficult to solve the problem from the root, the need to support fiscal reforms." Said Shen Jianguang, chief economist at Mizuho Securities.

"Faucets and water" relationship

Less than a month, and a heavy document by promoting an open capital account. SAFE last month issued a "multinational centralized operational management of foreign exchange funds (Trial)" (Hui Fa [2014] No. 23) to enable the industry to exclaim its opening up great - regulatory shackles are leveraging debt, China's capital doors gradually loosened.

And the 29th Man aims decentralization, reform of the foreign exchange management of cross-border security, cross-border security to achieve basic convertibility, and in foreign uniform treatment. Lending areas, including warranty, contract remains the case registration link; outstanding loans within the field of security, allowing in foreign self-signed, and allows recognizance performance in a fold of the net assets.

FTA FTA association is called financial reform in the second quarter peak SAFE No. 23, 29 maybe less text "practical", which does not involve the transaction, but like an open capital account "infrastructure."

Zhang example, companies need only send a payment instruction, banks will be able to exchange their currency into foreign payments needs, while in the past the need to issue multiple instructions.

"Can not put free trade facilitation, investment and financing account fully equate it open only to investment and financing facilitation and an open capital account convertibility provides a carrier and tool;" Zhang said, "involves investment and financing facilitation to capital account convertibility, to do the work is not complete freedom of capital convertibility, but there are steps to make sub-categories managed capital account convertibility. "

Guotai Junan Securities chief economist Lin Caiyi interpretation of this passage is the relationship between the faucet and the water supply. "And announced one day, how much water, and then the next 'big opening up' conclusion is not too late." Lincai Yi said.

So, for now, free trade account can do what thing? "Conditions" indicates convertibility has been achieved on the business, including current and direct investment-related business, free trade within the capital account convertibility directly, not approved for business, the third part of the central bank 30 comments innovative business financing involved in various types of capital account convertibility business, not in the current free trade account. Implementation of the relevant parts of a mature one, when put to, various departments and central bank shall be to promote together.

A regulation with respect, FTA account equivalent to offshore accounts, previously only a few banks, banks and enterprises now have it. But "how to use the RMB debt accounts prudent macroeconomic management, and the future is open to other capital transactions with FTA Account" is unknown and so on.

But above all it seems at Chen Jianguang, an open capital account in accordance with the established timetable to go, probably 2015, 2016 years, that perhaps the interest rate market point in time. Coincident with the central bank governor Zhou Xiaochuan in March for the first time today, a two-year deposit interest rate mentioned in the market schedule.

Liquidity unharmed?

Coincidentally, Liu Yuhui also believe that the system construction of China's capital account in an orderly manner. He said, it is easy to see, after the Spring Festival, there are signs of central bank intervention in the exchange rate, the goal is to suppress the system construction arbitrage and capital account.

Accordance with the "impossible trinity" theory that a country independent monetary policy, a fixed exchange rate and free capital flows can only choose two of the three goals. Central Bank officials said that in the long run, free capital flows and floating exchange rate system would be the inevitable choice of China.

This fact also explains the "capital flows, exchange rate fluctuations, independent monetary policy," the relationship. Capital account liberalization allows two-way cross-border capital flows together; present reality is confined to the central bank's intervention, are drawing the flow of capital within a period of changes in exchange rates.

According to Goldman Sachs report, along with the advance of capital account market, there will be more Chinese wealth invested in other parts of the world. Its cross-country comparisons show that in the case of capital account liberalization, the scale of Chinese investment overseas funds will likely increase $ 6 trillion. One third of the expected flow of global capital markets.

Data also show that, the effect of the RMB exchange rate changes on capital flows are gradually markedly. SAFE data show that in April 2014, the banking exchange surplus of 59.7 billion yuan, compared with March banking exchange surplus dropped by nearly 76%. Subtext is the recent devaluation, to a certain extent Hetui hot money arbitrage cross-border trade.

At the same time, every year in June the bank is a sensitive period: number of indicators deposit ratio, capital adequacy ratio, dynamic reserve and other banks to the end of the quarter, half and end when the end of the audit. Seeing June sensitive time window approaching, the market began to worry about whether a similar extreme events like last year's money shortage will occur. "Liquidity basically unharmed, the central bank has already done related institutional arrangements, its standing lending to financial institutions can be a convenient tool 'emergency'." GF Securities chief economist Liu Yuhui said. Additionally, the market orientation of the central bank to transfer the CDB, CCB drain 500 billion, all in central bank hands.

On liquidity management issues, Liu Yuhui, the central bank's improved tremendously in order to ensure the inter-bank market liquidity, which can give the right to provide direct financial machine refinancing.

This is true. Approaching in June, the central bank's open market operations are also extremely cautious. As on May 22, in the period of 28 days, the interest rate of 4% of the 85 billion repurchase maturity, based on the issue of 30 billion repurchase, the day the net amount invested 55 billion. When the net amount invested 120 billion week, last week the net amount invested over 44 billion 76 billion. "It's basically eliminate the possibility of 'shortage of money' is." Liu Yuhui analysis, "financial institutions as long as there is demand for funds, you can borrow money from the central bank."

Because, in the period (debt) risks associated with long-period (real estate) pressure on the risk of future economic adjustment superimposed difficult to forecast. The current cycle of debt and capacity into the top of a basic consensus, into the top of the real estate cycle is still controversial, but the market is not optimistic sign. "If in the long economic cycle overlay, open capital account is not achieved in the case of exchange rate flexibility mechanisms will accelerate the economic downturn, there are uncontrollable risk." Liu Yuhui said.

The central bank is concerned, this is undoubtedly a step startling fluidity control "dangerous" move, despite the current liquidity unharmed to see, but it can not solve the "financing of the" brutal reality of monetary policy instruments on this almost ineffective.

Economic cycles superimposed policy onrush man?

In fact, the Chinese capital account liberalization steps, Zhou Xiaochuan has given direction. He wrote that the study established interoperability mechanisms inside and outside the stock market, and gradually allow qualified foreign companies issuing shares in the domestic capital market and broaden investment channels for residents. The renminbi capital account convertibility is an orderly way, according to the IMF standards, 85% of China's capital projects have been in more than a basic level of convertibility.

And back to the 29th article of the "loans backed" conditional relax on, such as the number of insured loans outside the control within canceled. Eliminate unnecessary restrictions and other qualifications. The other side of the coin is that allegedly affected by the impact of the current round of devaluation, many inside and outside through the "loans backed" arbitrage establish long positions of speculators RMB had open out. Among these, there may not be bailing out the arbitrage.

So relaxed "within the warranty loan" while active funds, intentionally or unintentionally, may give affected by the depreciation of the RMB before, by "loans backed" channel arbitrage, built RMB longs bailing out speculators can not impose help.

An understanding of the financial sector within the warranty Loan said that some within the warranty credit file in order to obtain financing or even arbitrage and done, it is normal for companies financial operations. But precisely this action to a certain extent arbitrage "whitewash" China's import and export data, thereby affecting the balance of payments, foreign exchange reserves.

Over the past few years because of the appreciation of the RMB exchange rate in overseas markets is expected to be greater than domestic expectations, there are differences within the DF NDF market and the market price of RMB against the U.S. dollar, providing a risk-free arbitrage space. Now shrunk - the central bank to combat arbitrageurs make up two-way volatility of RMB exchange rate.

From the capital account liberalization, exchange rate reform, not difficult to find, financial market reform increasingly accelerated pace. But this is not enough to change the status quo.

Like lending rates simply get down. The financing become a common phenomenon. Explain the logic of a central banker is related to the issue of financing of the interest rate reform. Excellent corporate financing rates may be relatively low, so the level of interest rates is a manifestation of financing the competitiveness of enterprises.

Above the central bank officials said the exchange rate reform is concerned, is on the whole package of policies to expand domestic demand, among other policies launched together with the aim of promoting international balance of payments. Under the Chinese economy, "transfer mode, adjust the structure of the" background, not simply to promote market-oriented interest rate reform of the financial sector.

"It should also focus on coordination and reform in order to increase the reform of state-owned enterprises such as SBC departments in advance when the financial reform, including fiscal reforms started." Shen Jianguang said.

However, the reform of the situation getting better. May 16-17 May 2014 national work conference of economic reform, economic reform to ensure the completion of the 2014 nine key tasks. "Deepen fiscal and financial reform; promote the reform of state-owned enterprises, the development of mixed ownership economy" will be the implication of them. But the timetable is still unknown.