The conditions for accelerating the opening of capital accounts in China are basically mature and risks are now controllable, according to a report by a research group led by Sheng Songcheng, head of Financial Survey and Statistics Department of the Chinese central bank.
Currently, China has become the world's second largest economy and trading nation. It may miss the precious opportunity to open capital accounts if it waits until the conditions have become completely mature.
Opening capital accounts is a process of gradually relaxing capital control and allowing residents and non-residents to hold cross-border assets and engage in cross-border assets transaction so as to make the currency convertible. What influences will opening capital accounts have on ordinary investors and enterprises?
Residents are expected to have more investment channels.
The report shows that Chinese households have relatively fewer investment channels. As a result, a large amount of savings funds cannot preserve or increase the value. Opening capital accounts and increasing overseas household investment channels can promote the accumulation of household wealth and improve China's consumption standards.
The report, however, also indicates that individuals' overseas investment channels will only be opened in a later stage according to the capital account opening timetable and this issue will only be considered in at least five to ten years.
Opening capital accounts will enable ordinary residents to hold cross-border assets and have more investment and financing choices, but industrial experts noted that there are also risks.
Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, said that opening capital accounts will result in a large quantity of foreign capital inflows to contest for quality customers with domestic banks. Guo noted that foreign banks usually have more mature operation and management and can provide better service. While contesting for customers, foreign banks will also exert a huge competitive pressure on domestic commercial banks, which will increase instability of China's banking system.
Guo said in the current financial system dominated by banks, a large sum of international capital will flow into China through the banking system after opening capital accounts. Such capital inflows can increase banks' loanable funds and help China's commercial banks to enlarge business scale and expand international business. However, China's banking system is less competitive over the past years and its commercial banks also lack experience related to international capital operation.
Opening capital accounts will help Chinese enterprises to invest overseas, achieve merger and acquisition of foreign enterprises, as well as obtain technologies, market and resources. Moreover, opening capital accounts and increasing the inflows and outflows of the yuan will further improve the yuan's position in international trade settlement and overseas investment, and will further promote the development of an offshore market in Hong Kong and accelerate the innovation of offshore yuan financial instruments. As RMB will gradually be used for international valuation, payment and investment, it is probably not far off when RMB becomes the international reserve currency.
