The Temptation of China s Capital Account

Banks capital adequacy ratios were set globally, and, once set, remained fixed.

Similarly, banks would have incentives to game capital adequacy requirements by manipulating how capital and assets are defined.

There seems to be little appetite for proposals to vary capital adequacy requirements counter cyclically.

It is time to add managing the capital account to this list.

This has come at the expense of sectors that are more dependent on equity financing.

China has a two tier system in which the capital account is strictly controlled most other currencies don t distinguish between current and capital accounts.

As such, the timing could not be worse to float the idea of speeding up capital account liberalization.

To be sure, a cautious approach should not be allowed to impede incremental progress toward capital account liberalization.

Progress in institution building is also important for a well sequenced liberalisation of the capital account.

Since high risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough.

European banks, traditionally a major source of trade finance, have pulled back dramatically, owing to capital adequacy problems caused by sovereign debt capital losses and, in some cases, losses from real estate lending.

There seems to be little appetite for proposals to vary capital adequacy requirements counter cyclically. This would enable capital buffers to be created in good years, which could then be drawn down in bad years.

It is hard to argue that the RMB is not undervalued, given China s large and persistent current account and capital account surpluses.

The Asian financial crisis persuaded China s leaders to shelve plans, launched in 1994, to liberalize the capital account.

For instance, we know that the global capital adequacy requirements produced by the Basel Committee reflect overwhelmingly the influence of large banks.

Most economists in China seem to support the PBOC s stance, citing the potential benefits of capital account liberalization.

Indeed, ignorance about what is actually at risk makes debates about the right formula for capital buffers surreal. Moreover, the use of mechanistic rules to determine capital adequacy has also inadvertently encouraged systemic imprudence.

Moreover, the use of mechanistic rules to determine capital adequacy has also inadvertently encouraged systemic imprudence.

Most economists in China seem to support the PBOC s stance, citing the potential benefits of capital account liberalization. But Chinese policymakers should also recognize the significant risks inherent in relaxing capital controls.

Initial capital

In early 2012, the People s Bank of China (PBOC) released a report calling for policymakers to take advantage of a strategic opportunity to accelerate capital account liberalization.

As above, firm value is enhanced when, and if, the return on capital exceeds the cost of capital.

The Art of Capital Flight

Damming Capital

The Capital Flow Conundrum

Capital flows and remittances

E. Financial capital and resilience

The portion of capital inflows that is not re exported represents net capital inflows.

Moreover, in October, the IMF is set to release official rules of the road for the use of capital account regulations.

In a growth mechanism where the external oil windfall component weakens, the internal component, which is dependent on higher productivity, technology and an adequate articulation between physical and human capital, would be best employed in offsetting the fall in oil rents.

As such, the timing could not be worse to float the idea of speeding up capital account liberalization. On the contrary, the Peoples Bank of China (PBoC) and other relevant authorities should consider capital controls, market suspensions, and emergency liquidity provision.

The Siren Song of Capital Controls

Investment and private flows

(o) Working Capital Fund

Brazil has been aggressive in terms of capital restrictions, twice increasing its tax on financial inflows.

They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy if not the entire global economy into a tailspin.

Of course, some discussion of financial sector reform is taking place in a variety of forums, with a gradual consensus building around sliding or incremental capital adequacy rules.

Regarding the banking sector, stress tests have been applied since 2004, and a target capital adequacy ratio of 12 has been maintained since 2006.

व श व क प ज क र ख फ र ट यर क ओर

Jacqueline Novogratz on patient capitalism

The reason lies in capital movements.

Finally, there is the path of public capital.

Surviving the Great Capital Flood

Raising capital is expensive.