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

The Temptation of China s Capital Account

But China slowed capital account liberalization after the Asian financial crisis ten years ago, so it is possible that America s troubles could make China more cautious.

Capital controls enabled China to emerge from the Asian financial crisis of 1997 1998 largely unscathed, even though its financial system was at least as fragile as those of the affected countries. The Asian financial crisis persuaded China s leaders to shelve plans, launched in 1994, to liberalize the capital account.

Another global financial crisis could disrupt short term capital inflows.

This is why capital account regulations are allowed under IMF rules, and why the attempt to introduce capital account convertibility into the IMF s Articles of Agreement was defeated in 1997.

Second, much will depend on how China navigates the transition to a more open capital account. History is littered with financial crises occurring in the wake of precipitous capital account liberalization.

Kaduang has posted an eyewitness account of yesterdays happening in capital Yangoon.

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

Moreover, the pattern of accumulating reserves via current account surpluses, net private capital inflows, or both a legacy of the 1997 1998 Asian financial crisis will continue and perhaps become even more pronounced.

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

That would be very difficult to manage without some form of capital account regulation.

A country with current account and capital account surpluses and increasing foreign exchange reserves normally sees an excessive money supply and high inflation.

But the rise would most likely be offset by capital outflows, as looser capital controls would enable savers to escape the financial crisis.

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.

More importantly, the crisis highlighted the risks associated with high dependence on foreign capital.

The loss of the capital role provoked an economic and social crisis in Parma.

History is littered with financial crises occurring in the wake of precipitous capital account liberalization.

A country that has a balanced current account does not need any additional foreign capital.

With current and capital account surpluses, the renminbi s exchange rate is still under upward pressure.

The current account deficit has been almost eliminated, and the banking crisis contained.

During the crisis, we saw how quickly capital fled from countries previously considered safe bets.

Second, much will depend on how China navigates the transition to a more open capital account.

A serious discussion of global capital account regulations would benefit both advanced and emerging market economies.

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

That is what happened in the second half of the 1990 s, as the IMF began to preach capital account liberalization, applied over stringent fiscal remedies during the Asian financial crisis, and single handedly tried to reshape Asian economies.

Ditching the euro might trigger a banking crisis, capital flight, inflation, and perhaps even sovereign default.

But whether renminbi appreciation will work depends on reducing China s net capital inflows and current account surplus.

NEW YORK Capital account regulations have been at the center of global financial debates for two years.

A much better way forward is to rethink seriously the role of cross border capital account regulations.

Doing so will require maintaining some capital account control, while raising interest rates to market clearing levels.

On April 1994, the capital was moved again to its present location on account of political considerations.

With Europe mired in crisis, capital flows from Tunisia s resource rich Arab neighbors are its best hope.

Monetary policy was undermined by the banking crisis, and any reduction of interest rates to boost economic activities would encourage further flight of capital and stop capital inflows.

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

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

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

In the recent IMF document, the Fund proposes a set of guidelines that countries should use for capital account regulations (which they call capital flow management measures, or CFMs).

But it is just as essential that developing countries maintain an appropriate degree of policy autonomy in managing capital flows and choosing whatever capital account regime they deem appropriate.

The tremendous growth in global current account imbalances magnified problems that led to the financial crisis.

Its current account surplus peaked, before the financial crisis of 2008, at around 11 of GDP.

Even the International Monetary Fund now recognizes that capital controls may be useful, especially in times of crisis.

Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact.

In 2012, the capital was worth around SEK 3.1 billion (USD 472 million, EUR 337 million), which is almost twice the amount of the initial capital, taking inflation into account.

Finally, any regulation in this area should recognize that capital account convertibility is not obligatory for the IMF s clients.