China’s Central Bank Plays A Long Game Over Financial Reform

The long-term vision to ease China’s capital controls laid out by Sheng Songcheng, head of the statistics department at the People’s Bank of China dangles some juicy carrots, most immediately before the conservative forces that have brought financial reform to a standstill. Opponents of reform have been able to argue that China’s national interest has been well served by cross-border capital controls and the ring-fencing of the country’s financial system. They kept in at bay the post-2008 global financial crisis that has laid low the economies of the U.S. and Europe. So why any haste to change it?

Yet this very weakness in the West, the reformers now say, provides China with a strategic opportunity over the next three years “as the shrinkage of the Western banks and companies has opened up space for Chinese investments”. They hope that will touch a sufficiently patriotic nerve for even the most conservative nationalist to overlook the easing of capital controls this timely gathering in of foreign assets would imply–“clearing the path for it” is the way Sheng puts it.

Greater use of the yuan in trade would inevitably follow this splurge in overseas investment. That is phase two of the central bank reformers’ plan, to be implemented in three to five years time. Then would come phase three, in five to seven years time, a wide opening of domestic debt, equity and property markets to foreigners. Eventually, at a time to be determined, the currency would become fully convertible.

That wouldn’t likely be for at least 10 years. By then what China’s economy will require from its financial system, assuming it has rebalanced into a high-income, domestic demand-driven economy, no means a given as the controversy already stirring over a World Bank report on the Chinese economy in 2030 to be published on Monday indicates, will be very different from what they are today–and even the old guard will be gone from the last redoubts of glacially paced gradualism. The only question now is will the new leadership bite?

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