Globalization of financial services in China:
implications for capital flows, supervision and monetary policy
Saturday, 19 March 2005
Bank for International Settlements (BIS)
Research Institute of Economy, Trade, and Industry (RIETI)
Bank of China (Bank of China)
By the end of 2006, China, bound by its WTO financial services liberalization commitments, must allow substantial foreign participation in its financial market, in particular, the banking sector. Although China still maintains foreign exchange restrictions and capital controls, because of the nature of the banking business, some transactions by foreign banks will have a direct impact on the pattern of China's capital flows and consequently on the effectiveness of its capital controls. Indeed, the consensus view is that foreign bank entry may make the current capital control regime less effective, thus leading to de facto capital account convertibility. Increased globalization of financial services in China will have a far-reaching impact on the pattern of capital flows, bank supervision, and the conduct of monetary policy.
On March 19th 2005, RIETI, together with the Bank for International Settlements (BIS) and Bank of China, organized a high-level international conference in Beijing aimed at addressing these issues in depth. The conference comprised two sessions: The morning session dealt with the changing patterns of capital flows in China, the Korean experience of foreign bank participation in the domestic financial market, and the capacity-building required by regulatory agencies to strengthen prudential regulation. The afternoon session examined the effectiveness of capital controls in China and challenges to the conduct of its monetary policy.
The conference was opened by Mr. Robert Sleeper, Head of the Banking Department of the BIS, who emphasized the important role of foreign participation in improving the efficiency of the banking system in emerging market economies. Dr. Zhu Min, Assistant Executive President of Bank of China gave a keynote luncheon presentation highlighting the reform of China's state-owned commercial banks and the necessity for further ownership reform of the state-owned banks in China. The conference was closed by Dr. MasaruYoshitomi, President and CRO of RIETI, who summarized the key findings of each presentation and stressed the importance of institution-building to close the gap that has arisen from the development of financial services and financial liberalization in China. In light of China's changing pattern of capital flows, the effectiveness of its capital controls, and the growing global financial imbalances, China would be better served by coordinating its shift to a new exchange rate regime with other East Asian economies because of its integral role in promoting and facilitating the ongoing and rapid economic integration in the region.