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People's Daily Online>>Opinion

China's capital account liberalization remains arduous (2)

(Xinhua)

16:39, March 01, 2012

"The government will be cautious in promoting capital account liberalization, as once you fling the doors open to global capital, it will be difficult to close them," he said.

Higher interest rates for the yuan in comparison to foreign currencies have already been a magnet for overseas capital, leading to an influx of speculative money and arbitrage speculation.

Zhao said the instant loosening of capital account restrictions may attract more hot money, undermining the country's efforts to curb inflation and asset bubbles.

Hot money will often retreat from a country when its economy becomes mired in a recession, contributing to slower economic growth. On the contrary, massive amounts of speculative money will flood into a country when its economy overheats, which can result in asset bubble bursts or even an economic crisis.

China has faced massive cross-border capital inflows in the first half of 2011, driven by expectations of a stronger yuan and interest rate differences between China and other developed economies, according to a report issued by the State Administration of Foreign Exchange late last month.

But the inflow trend was interrupted in the second half of last year, particularly since the end of September, amid a liquidity crunch in overseas markets and reversed expectations for the yuan in offshore markets.

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