Working Papers

2018-10 | May 2019

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Optimal Capital Account Liberalization in China

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China maintains tight controls over its capital account. Its current policy regime also features financial repression, under which banks are required to extend funds to state-owned enterprises (SOEs) at favorable terms, despite their lower productivity than private firms. 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 inter-temporal allocative efficiency. Along a transition path with a declining SOE share, welfare-maximizing policy calls for 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 https://doi.org/10.24148/wp2018-10