Currency Convertibility, Cost of Capital Control and Capital Account Liberalization in China

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 study(1) 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.