Financial Stability Effect Of Capital Account Liberalization

With the deepening of economic globalization and international financial integration,developing countries opening of capital account control is the trend of this decade. In 2015,the central bank governor, zhou xiaochuan, said“ in the future, China will accelerate the capital account liberalization and China’s capital account opening is on the schedule ” on many occasions. But existing research found no strong evidence to prove that opening capital account could support the economic growth of developing countries. However,these countries’ frequent financial crisis has prompted people to rethink the capital account opening. And the international monetary fund which takes the implementation of capital account liberalization as a responsibility, since the 2008 financial crisis also changes its position, acknowledging the importance of recovery or strengthening capital controls. As the last line of defense of China’s financial stability, capital controls have played an important role for a long time. At present, domestically, the economic growth in China is clearly slowing down,. At the same time, deflationary pressures emerge slowly. In June2015 the crash of the stock market caused a lot of people complaining; At the same time,China’s real estate market is in a state of disorder. Because of the deleveraging in the supply side of the reform at present, both enterprises and local government debt will face the impact of the deleveraging; And along with the advancement of marketization of interest rate, commercial banks face a bigger operating pressure, and the rate of non-performing loans and debt defaults will rise. It will impact the financial markets continually, challenge their vulnerability, which will accelerate the speed of the money flowing out of China and threaten financial stability. From a abroad perspective, Federal Reserve has exited QE, and announced in December to raise interest rates for the first time in nearly a decade. It means it beginning to enter rate rises cycle. This action will make the external appeal enhanced, and cause China’s domestic savings and capital flowing out. By the impact of these factors, China is facing greater pressure on capital outflows. If China open of capital account at this time, it can be a shock for domestic financial stability.Based on the above research background, this paper systematically combed the relatedresearch results both at domestic and abroad. Based on research of the background and process of China’s capital account opening, this paper selects a representative sample of the countries in 1998-2014 data, and uses panel threshold data model to study the effect of initial conditions on the financial stability of capital account liberalization. And this paper also explores the effects of capital account liberalization on financial stability in different economies. Based on the empirical test results and combined with the actual situation of China, this paper studies whether China has crossed the threshold of the relevant,and how the upcoming opening of China’s capital account will affect financial stability. Finally, this paper will give the policy suggestions according to the results from the pattern of trade openness, financial deepening, the marketization of exchange rate,etc.