People's Bank of China building Zhang Peng/Getty Images

Why China’s Capital-Account Liberalization Has Stalled

Last year, the People's Bank of China abruptly hit the brakes on capital-account liberalization, tightening controls to a degree not seen since the Asian financial crisis of the late 1990s. Yet large-scale capital flight continues – and neither economists nor officials in China seem sufficiently concerned about it.

BEIJING – In early 2012, the People’s Bank of China (PBOC) took advantage of what it viewed as a “strategic opportunity” to accelerate capital-account liberalization, which has been underway since 2009. The renminbi, it was expected, would be “basically” convertible by the end of 2015, and fully convertible by the end of 2020. But things haven’t worked out as expected.

Problems began in 2014, when China’s capital account, which had been in surplus since the 1990s, swung into deficit. By the end of the next year, the deficit had grown so large that China’s overall balance of payments (BOP), too, turned negative, even as China’s current-account surplus remained above $300 billion. Last year, China’s capital-account deficit amounted to some $200 billion.

To protect the renminbi, the PBOC intervened heavily – a process that proved costly. In less than two years, China’s foreign-exchange reserves fell from their peak of $4 trillion in mid-2014 to just below $3 trillion.

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