BEIJING, Oct 10: Yu Yongding, a former central bank adviser, has warned China to take cautious and gradual steps in fully liberalising its capital account to prevent ‘unpredictable’ risks.
Yu, an influential researcher at the Chinese Academy of Social Sciences, said the time is not yet ripe to allow a free flow of short-term capital across borders, though most other items under the capital account had already been opened.
Instead of rushing to ditch capital controls, he said, China must first speed up the reform of domestic financial markets to close risky loopholes in the system and pave the way for the eventual relaxation.
‘China should not prioritize the task of opening capital account on its reform agenda. In fact, we have many other more urgent things to do right now,’ Yu told the official China Securities Journal in an interview published on Thursday.
He said China must quicken reforms to set up market-based interest rate and foreign exchange regimes, including launching its own benchmark interest rate in the money market and formulating a maturity structure curve for treasury bonds.
‘In a country where many factors are still distorting market forces, a free flow of capital across borders could do more bad than good,’ he said.
Yu also noted a several other factors that could exacerbate financial market risk if the capital account were fully liberalised. These included high local government debt, rising bad loan ratios, shadow banking, a frothy property market, and the U.S. Federal Reserve’s expected tapering of its stimulus programme.
Beijing began opening its capital account in 1993 and many officials and economists in recent years have been hailing it as an important driving force of other financial reforms.
Many expect full opening by the end of 2015. (agencies)
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