China ready to free capital flows?

Since China's cabinet did not provide a roadmap regarding easing control over the yuan, analysts believed the authorities will deal with the currency cautiously.

The People's Bank of China (PBOC) published a study last year, championing a cautious but forward-looking approach, recognizing that the country had already made significant achievements in liberalizing capital movements while maintaining a stable financial system, and risks for further deregulation are manageable.

"But no one said China would make significant moves this year. Actually this year is not a good time to open the capital account, " said Liu Ligang, chief Greater China economist at ANZ Banking Group.

Capital inflows to China have been surging as indicated in recent trade data, and with major central banks pumping cheap money into financial markets, relaxing capital regulation would entice more hot money given big spreads between Chinese and foreign interest rates, according to Liu.

"Freeing capital flow this year will surely cause distortions in financial markets. With the US economy picking up later, the capitals are set to run back to the States," Liu added.

Yu Yongding, a well-respected economist at the Chinese Academy of Social Sciences, a think tank, expressed worries about freeing capital flow as well.

"China should not rush to fully give up capital control," Yu said. "We're in a time of economic and financial uncertainties, and the capital control is a firewall. Though the firewall is leaking, it's better than not having one."