Photo: Guang Niu/Getty Images
China has released a multi-year, three-step plan to ease capital controls and open its financial markets to the world. Its central bank is pushing to speed up the process of yuan reforms.But Martin Wolf, of the Financial Times argues that China should take its time in opening up its economy in order to avoid creating the next big financial crisis.
What are the changes?
The first change would take place over the next three years and would allow for more Chinese investment abroad. Developed markets have seen a decline in western banks and companies, which has created an opportunity for increased investment from China.
The second phase would take three to five years. During this phase foreign lending of the renminbi would increase, and in about five or 10 years, foreign investors will be allowed to by Chinese stocks, bonds and property.
Making the renminbi fully convertible would be the last step.
Why is it important for Beijing to be cautious about its reforms?
Wolf points out that most countries have gone through a crisis after financial liberalization: the U.S. in the 1930s, Japan and Sweden in the early 90s, Mexico and South Korea in the late 90s. From the Financial Times:
“Presumably, the greater freedom for capital outflows envisaged for the next five years would partly substitute for accumulations of foreign currency reserves. Yet if this went with suggested moves towards higher real interest rates, China’s savings and current account surpluses might explode, worsening the external imbalances.
This point underlines just how big a stake the rest of the world has in the nature of China’s reform and opening up of the financial sector.”
China’s gross savings rate is already 50 per cent more than the gross savings of the U.S.. Its financial institutions are growing and will soon be some of the biggest in the world. The Chinese integration would have massive implications for the global economy through investments and consumption, and a slower approach to reforms, along with more balanced growth, is in the interest of the global economy.