Although #China’s capital account today has basically realized convertibility, there remain many restrictions on cross-border #capital flows. What is a proper timing for China to open up its capital account? Prof Huang Yiping offers his perspectives:
This is a controversial issue. Some believe China should step up efforts right now; others say it’s not a good timing. Prof Huang previously thought the best timing for this is when the macroeconomic environment is stable...2/7
...with strong growth, stable inflation, fiscal balance, balance of payments surplus, and a properly valued currency, because under these conditions investors are confident in capital account opening, and it’s easier to prevent against asset price slumps or capital flights...3/7
But after examining experiences of other developing countries, he now believes opening up the capital account at the so-called good timing can also incur risks, because huge capital inflows could overheat the economy and bring about asset bubbles and #currency overvaluation...4/7
At this time, once a risky factor sees undesirable reverse it could trigger financial fluctuations, risks or even a crisis. Opening up the capital account when the #economy and #finance are doing well could lead to buildup in new risk factors...5/7
Another problem is that when the economy is good, people tend to overlook risk factors, which explains why many economies ended up with financial crises even though things had been going well when they first opened up...6/7
His conclusion is that now may not be the best timing for China to open capital account. Opening up when the economic and financial landscapes are not very ideal could keep policymakers and the market alert against risk factors, which may be more prudent and sustainable. 7/7
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According to CF40’s latest macroeconomic quarterly report ‘China's Countercyclical Fiscal Policy and Sustainability of Government Debt’, China has never heavily relied on budgetary spending to provide counter-cyclical stimulus. 1/5
Instead, it mainly adopts a model where local governments, financial institutions and local government financing vehicles work together to boost investment. 2/5
Statistics show that such a model has helped China stabilize its economic growth, but also increased the broad government debt to GDP ratio, raising concerns about the sustainability of government debt. 3/5
China could consider implementing negative individual income tax (IIT) to boost consumption and employment, advises CF40 research department. 1/4
It means that the government provides taxpayers with a certain amount of subsidy when the level of working income is lower than a given threshold. 2/4
A CF40 policy brief proposes a two-pronged policy scheme consisting of rewards and subsidies for businesses adding new jobs on one hand, and negative IIT on the other hand, which could drive spending and employment without causing excessive fiscal expenditure burdens. 3/4
The PBC's "benign neglect," an indirect policy tool devised in 2022 to influence the value of the RMB, was quite successful. It allows the market to determine the exchange rate while retaining capital controls as a last resort.1/5
It should be the most effective currency strategy for China's central bank, said CF40 Advisor Yu Yongding in a recent seminar.2/5
China should maintain a floating exchange rate regime to bring out its role as an automatic stabilizer while maintaining necessary capital control as a last resort.3/5
Despite the shrinking working-age population, there is a tremendous pool of surplus rural labor in China., said Caifang, Chief Expert of National Think Tank of Chinese Academy of Social Sciences. 1/5
Many analysts predict that China will not have a rapid growth rate in the future or emerge as the largest economy in the world because its working-age population and total labor have stopped growing. 2/5
23% of the total labor in China are rural labor. In comparison, the percentage in highincome economies is only 3% or 4%. That means China needs to transfer 20% of its labor from rural to urban industries, which is huge given China’s enormous population. 3/5
#China could consider implementing negative individual income tax (IIT) to boost consumption and employment, suggests CF40 Research Department in a 2022 policy brief ‘Negative Individual Income Tax: Some Thoughts on Policies to Drive Employment and Consumption’. 1/4
It means that the government provides taxpayers with a certain amount of subsidy when the level of working income is lower than a given threshold. 2/4
The policy brief proposes a two-pronged policy scheme consisting of rewards and subsidies for businesses adding new jobs on one hand, and negative IIT on the other hand, which could drive spending and employment without causing excessive fiscal expenditure burdens. 3/4
Given China’s macroeconomic environment in December 2022, the following policies should be taken to boost China’s economic growth and deal with potential risks, said ZHANG Bin, CF40 Nonresident Senior Fellow: 1/5
1. Lower interest rate by 25 bps each time until the employment and growth targets are hit. 2. Issue new types of fiscally subsidized bonds and policy loans to support investment in public goods and quasi-public goods infrastructure projects that feature limited returns.2/4
3. Set up special funds to help market entities battered during the pandemic get back on their feet; increase the amount of living allowance for low-income groups. 3/5