Currently, China is integrated within the global economy as a low-value-added manufacturer. Because the government controls the banks, they can channel the savings to the industries that they want to develop.”Īs a result, abolishing capital controls will involve a fundamental shift in China’s growth model. “By implementing capital controls, you put all domestic savings within the borders, and savings have to be placed with banks. “China’s growth model relies on state investment,” he says. This is where the government exerts control over the entire banking system, including larger banks. A legacy of strong growthĬhina’s growth model is arguably reliant on the government’s capital control regime, and is built on what Feng describes as “financial repression”. Covid‑19 will also need to be well contained. Unless China’s economy begins to show strong signs of recovery, Chinese policy-makers will not consider relaxing its capital control regime, he adds. China still needs investment it does not want capital to leave the country,” Feng says. “The control measures seek to prevent currency and capital outflow. While Feng notes there have been a number of major changes, he stresses the majority of controls remain largely intact as the economy remains “shaky”. However, the 2015–16 Chinese stock market turbulence –which led to a stock market meltdown and subsequent capital flight – marked the beginning of stricter capital controls. Since the mid-1990s, China has embarked on a number of initiatives to relax elements of its capital control regime. Beijing is not actively promoting RMB now, and that is reflected in the market.” Control measures “Its priority has changed since the time it actively promoted RMB in 2015. “ priority at the moment is not on RMB, but the economy,” he says. Feng says the government’s priorities have changed from actively promoting the use of RMB internationally to attracting international investment to boost economic growth. ![]() The move signalled China’s growing prominence within the global economy, and has helped grow its status among global reserves.īut the pace of China’s capital account liberalisation has slowed, following a change in focus from the government. The biggest milestone, however, came in 2015 when the International Monetary Fund ( IMF) decided to include RMB in its SDR basket of currencies. Chinese government bonds are also being included in various global government bond indexes. While the share might not yet be up to par with that of the US Treasury market, it is a noticeable change in just a few short years. “China has gone from very little to a double-digit share of the domestic central government bond market, now owned by the rest of the world,” says Robert McCauley, non-resident senior fellow at the Global Development Policy Center at Boston University. Meanwhile, the world’s bond investment managers have been moving a sizeable amount of money into the Chinese domestic bond market.
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