Expert warns against hasty capital liberalization

BEIJING - The Chinese yuan's going global has to progress with the marketization process, and the country should not push capital liberalization too hastily, an expert with a government think tank has told the China Securities Journal.

A report in the daily's Thursday edition quoted Yu Yongding, an economist with the Chinese Academy of Social Sciences, as saying capital liberalization can not be the priority in China's development, nor the impetus in pushing the country's reforms.

"Before the financial reforms are completed, removing capital controls can lead to unexpected risks," said Yu, who sat on the central bank's monetary policy committee from 2004 to 2006, when China was planning to allow the yuan to appreciate.

The Chinese government began cross-border settlements of its currency in 2009, and in 2012, the central bank announced that all Chinese companies could settle their trades in yuan and more directly swap foreign currencies with it. Now China has signed agreements with over 20 countries and regions to allow their currencies to be directly exchangeable.

Yu said certain capital controls remain necessary for the time being in China, considering the serious overcapacity, huge liabilities, risks in the monetary market, dangers in shadow banks, high housing prices, improving exchange rate, capital outflow and international financial risks.

He told the journal that the wrong schedule for liberalizing capital would bring negative impacts to the distribution of resources, which could even trigger a crisis.

"The financial crisis bursting in Asia in 1997 involved the wrong timing of capital liberalization," Yu explained. "Consequent fluctuation in foreign exchange rates would impair the market."

In his opinion, China should first build its own exchange rate formation mechanism before liberalizing capital, so as to preserve the yuan's independence.

Currently, the yuan is convertible for trade purposes under the current account, while the capital account, which covers portfolio investment and borrowing, is still largely controlled by the state over concerns of abrupt capital flows moving in and out of the country.

The world's second-largest economy announced last month that it would build a free trade zone in Shanghai as a test bed for pushing forward full convertibility of the Chinese yuan and the opening of financial services.

"To continue managing cross-border capital will not hinder the country's striving for the yuan's full convertibility," Yu said. "Capital controls do not run counter to the opening-up policy which welcomes foreign financial institutions."