currency convertibility, cost of capital control and capital.pdfVIP

Currency Convertibility, Cost of Capital Control and Capital Account Liberalization in China * ROBIN HANG LUO CHUN JIANG This paper provides a synthetic view of the capital account liberalization, capital control and currency convertibility issues in China. A quantitative analysis following Henry’s study1 fails to provide clear links between liberalization, diminishing capital controls and Chinese stock market returns. An institutional explanation is then offered to complement the quantitative analysis. We suggest that the property rights regime is an indispensable institutional variable when studying this topic. Originating from the current property rights regime; price distortion, moral hazard and monetary overhang are the main impediments towards capital account liberalization and full convertibility. Therefore, property rights reform should be given the first priority in Chinese economic reform. Key words: Capital control, China, Convertibility, Liberalization, Property Rights INTRODUCTION Prior to the post-Mao reform, China was a command economy in which the government typically exercised monopolistic power over foreign trade and foreign financial transactions which tended to erect barriers between external and internal market environments. Domestic price structure was distorted and economic performance of protected domestic firms was largely unrelated to the competitive international market. Liberalization began in the late 1970s, with direct investment inflows, gradual liberalization of the foreign trade regime and some opening up of credit markets. Since then, Chinas integra