Support us China faces a capital account dilemma. Image: Twitter China’s financial policymakers face a genuine dilemma. On one side, the country intends to gain deeper access to global capital markets, internationalize the renminbi and build a world-class market infrastructure that inspires global investors’ confidence and trust. On the other hand, financial liberalization has repeatedly triggered instability in other emerging economies — currency crises, capital flight and loss of monetary policy independence. To date, China has watched those episodes carefully from a position of controlled caution. It’s an approach that protected its economy during the critical early years of its economic rise. The conventional policy debate offers two options: open faster and accept the risks, or stay cautious and accept the constraints. Both sides are missing the more important question: not how open China’s capital account should be, but how the system governing capital flows should be designed. Brazil is the instructive counterexample. Brazil has one of the world’s most open capital accounts. In theory, that should mean efficient capital allocation and deep integration with global markets.
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