Optimal Capital Account Liberalization in China

RePEc Short ID: pli18
ORCID iD: 0000-0003-2073-0898

Liu, Zheng; Spiegel, Mark M.; Zhang, Jingyi

doi:10.24148/wp2018-10

Working Paper

Optimal Capital Account Liberalization in China

Abstract: China maintains tight controls over its capital account. Its current policy regime also features financial repression, under which banks are required to extend funds to state-owned enterprises (SOEs) at favorable terms, despite their lower productivity than private firms on average. We incorporate these features into a general equilibrium model. Our model illustrates a tradeoff between aggregate productivity and inter-temporal allocative efficiency from capital account liberalization under financial repression. As a result, along a transition path with a declining SOE share, welfare-maximizing policy calls for rapid removal of financial repression, but gradual liberalization of the capital account.

Keywords: capital controls; financial repression; China; Sequencing reforms; misallocations; welfare;

JEL Classification: F38; G18; O41;

https://doi.org/10.24148/wp2018-10