IMF warns on capital account

Opening China's capital account may trigger net portfolio outflows as holders of large domestic savings seek to diversify abroad, said researchers at the International Monetary Fund in a working paper.

Capital-account opening in China will likely be followed by substantial gross portfolio flows as global and domestic holdings adjust, said Tamim Bayoumi and Franziska Ohnsorge in the paper, issued this month.

The State Administration of Foreign Exchange has said qualified domestic institutional investors that are investing abroad on behalf of their clients could use whatever foreign currencies they prefer.Xie Zhengyi / for China Daily

"During the adjustment period, there may be net outflows from both equity and bond markets as domestic investors seek to diversify. ... This is in contrast to what would be expected if, say, India opened its capital account."

It said such net outflows of portfolio investment could offset pressures for reserve accumulation from net foreign direct investment or other investment inflows or current-account surpluses for several years to come.

China has been stepping up its pursuit of market-oriented financial reform and increasing the convertibility of the yuan under the capital account.

Just this past Tuesday, the nation loosened rules to allow domestic investors to put funds into overseas securities more easily.

The State Administration of Foreign Exchange said qualified domestic institutional investors that are investing abroad on behalf of their clients could use whatever foreign currencies they prefer. The application process for foreign exchange quotas would also be simplified.

Capital-account liberalization may be followed by an adjustment of Chinese assets abroad on the order of 15 to 25 percent of GDP, with a smaller adjustment for foreign assets in China on the order of 2 to 10 percent of GDP, the IMF said.

The paper said capital-account liberalization is likely to proceed gradually, and the net outflows the model predicts for China could well be spread out over several years. Over this period, the outflows would partially offset other balance of payments inflows.