Working Papers

2018-10 | August 2018


Optimal Capital Account Liberalization in China


China maintains tight controls over its capital account. Its prevailing regime also features financial repression, under which banks are often required to extend a fraction of funds to state-owned enterprises (SOEs) at below-market interest rates. We incorporate these features into a general equilibrium model. We find that capital account liberalization under financial repression incurs a tradeoff between aggregate productivity and intertemporal allocative efficiency. Along a transition path with a declining SOE share, the second-best policy calls for a rapid removal of financial repression, but gradual liberalization of the capital account.

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Article Citation

Liu, Zheng, Mark M. Spiegel, and Jingyi Zhang. 2018. "Optimal Capital Account Liberalization in China," Federal Reserve Bank of San Francisco Working Paper 2018-10. Available at