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Financial openness of China and India: Implications for capital account liberalisation

We gauge the de-facto capital account openness of the Chinese and Indian economies by testing the law of one price on the basis of onshore and offshor

Publishing date
14 May 2014
Authors
Guonan Ma Robert McCauley
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In this working paper we gauge the de-facto capital account openness of the Chinese and Indian economies by testing the law of one price on the basis of onshore and offshore price gaps for three key financial instruments. Generally, the three measures show both economies becoming more financially open over time. Over the past decade, the Indian economy on average appears to be more open financially than the Chinese economy, but China seems to be catching up with India in the wake of the global financial crisis. Both have more work to do to open their capital accounts.

Our price-based measures suggest strong inward pressure on Chinese money markets, in contrast to the consensus projection that China is likely to experience net private capital outflows when it thoroughly opens up financially. Policymakers need to monitor and to manage the risks along the dynamic path of capital account liberalization.

About the authors

  • Guonan Ma

    Dr Guonan Ma was a visiting research fellow at Bruegel until 2016. Prior to this, he was a senior economist at the Representative Office for Asia and the Pacific of the Bank for International Settlements (BIS) for thirteen years. Before joining the BIS in 2001, he worked as a chief North Asia economist for ten years at various investment banks, including Merrill Lynch, Salomon Smith Barney and Bankers Trust.

    Prior to his investment bank career, he was a lecturer of economics and research fellow at the Australian National University for four years following the completion of his Ph.D. in economics at the University of Pittsburgh (1990). Dr Ma was born in China where he obtained his undergraduate degree at Beijing University (1982). Guonan Ma has many publications on the Asian and Chinese economies and financial markets over the years.

  • Robert McCauley

    Robert N McCauley serves as the Senior Advisor, Monetary and Economic Department of the Bank for International Settlements (BIS) in Basel. Prior to this, he was the Chief Representative for Asia and the Pacific of the BIS. His recent work on Asia hasincluded analyses of capital flows, regional financial integration, bond and foreign exchange markets, effective exchange rates, foreign currency bank deposits, monetary policy, and foreign banks’ domestic currency operations. Before joining the BIS, he worked for 13 years for the Federal Reserve Bank of New York serving at times as chief economist for the interagency committee of bank supervisors that rates country risk. There he wrote on international comparisons of the cost of capital, foreign bank lending to US corporations and the unprofitability of foreign direct investment in the US. In 1992 he taught international finance and the multinational firm at the University of Chicago’s Graduate School of Business.

    He published several works on the euro, including the Princeton Essay, The Euro and the Dollar (1997). He also co-authored  Dodging Bullets: Changing US Corporate Capital Structures in the 1980s and 1990s (MIT Press, 1999) and the 7th Geneva Report on  the World Economy, Official Reserves and Currency Management in Asia: Myth, Reality and the Future, with Hans Genberg, Yung Chul Park and Avinash Persaud (International Center for Monetary and Banking Studies and the CEPR, 2005).

Theme
Global economy and trade Banking and capital markets
Keyword
emerging economies
Country
India China
Language
English

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