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中国的资本管制是否有约束力？
BIS Working Papers，No 233
Do China’s capital controls still bind?
Implications for monetary autonomy and capital liberalisation
by Guonan Ma and Robert N McCauley
Monetary and Economic Department of Bank for International Settlements
August 2007
BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from: Bank for International Settlements.
Press & Communications, CH-4002 Basel, Switzerland, E-mail: publications@bis.org, Fax: +41 61 280 9100 and +41 61 280 8100.
Abstract
The paper argues that China’s capital controls remain substantially binding. This has allowed the Chinese authorities to retain some degree of short-term monetary autonomy, despite the fixed exchange rate up to July 2005. Although the Chinese capital controls have not been watertight, we find sustained and significant gaps between onshore and offshore renminbi interest rates and persistent dollar/renminbi interest rate differentials during the period of a de facto dollar peg. While some cross-border flows do respond to market expectations and relative yields, they have not been large enough to equalise onshore and offshore renminbi yields.
Keywords: foreign exchange market, capital flows, capital controls,monetary policy, financial stability and the Chinese economy.
1. Introduction
Divergent interpretations of the interaction of monetary and foreign exchange policies in
China often arise from different assumptions regarding the efficacy of capital controls. At one extreme is the view that capital controls merely change the form of capital flows without altering their magnitude. On this interpretation, pegging the exchange rate or closely managing its path implies that China imports its monetary policy and lacks control over domestic short-term interest rates. At the other extreme is the view that capital controls are still effective or binding enough to allow short-term interest rates to be set domestically, even though the exchange rate is managed. The contrasts between these views sharpen in the context of growing cross-border flows under both the current and capital accounts over the past 10 years.
Different views on the status quo also inform the interpretation of the likely results of further liberalisation of capital flows. Again, at one extreme, this would just unevenly lower transactions costs and thereby alter the mix of cross-border capital flows, but without necessarily affecting their total volume. On this interpretation, capital account liberalisation might be of interest to specialists in international finance, but not to those who follow the Chinese macroeconomy. At the other extreme, capital account liberalisation would influence both the scale and composition of capital flows and ultimately force a choice between exchange rate management and an independent monetary policy. This paper examines both price and flow evidence to determine how effective China’s capital controls have been in the past and remain at present. We put the analysis of prices first because it provides the most telling evidence on the question. Our basic conclusion is that sustained interest rate differentials argue that Chinese capital controls have continued to bind, despite the responsiveness of cross-border flows to price signals in an increasingly open economy. These observed differentials cannot in our view be plausibly accounted for by liquidity or credit factors. Even the narrowing of these differentials since the unpegging of the renminbi in July 2005 leaves them at substantial levels. If capital controls still bite, future liberalisation is likely to proceed incrementally in order to accommodate a shifting balance of exchange-rate, and financial- and monetary-stability objectives.
In this paper, we define monetary autonomy narrowly in terms of the government’s ability to set short-term domestic interest rates. Such a definition may be appropriate to many industrial countries where monetary policy has confined itself to setting a short-term interest rate. In fact, China’s monetary policy employs a wide variety of other instruments, including setting administered deposit and minimum lending rates as well as quantitative measures like reserve requirements, lending quotas, window guidance and administrative restrictions on investment. Such measures could give China’s monetary policy room for manoeuvre even if its short-term interest rates were tightly constrained by the exchange rate policy. Thus, a finding that short-term interest rates are not tightly constrained implies a fortiori monetary independence in the broader sense that is more relevant in the case of China.
In what follows, Section 2 describes the increasing openness of the Chinese economy to cross-border flows as background for both price and flow analysis to follow. Then Section 3 reviews and updates the price evidence that capital controls are still binding. In particular we test whether onshore and offshore renminbi interest rates are substantially the same.
Recognising the practical difficulty of drawing appropriate comparisons given the low level of development of money markets in China, we introduce a comparison based on a newly introduced liquid instrument, the People’s Bank of China (PBC) bill. Section 4 examines the gap between renminbi and US dollar short-term interest rates during the period of de facto dollar pegging of the renminbi between the mid-1990s and July 2005, arguing that these rates converged as China’s inflation fell from double-digit levels in the early 1990s and not evidently since. Section 5 demonstrates the responsiveness of various measures of capital flows to interest-rate differentials and exchange-rate expectations. Section 6 discusses challenges to China’s capital account liberalisation. The last section concludes.
2. Growing cross-border flows vis-à-vis China
China’s capital control regime has two important features. First, capital controls tended to be tighter for cross-border flows thought to be more volatile than for more stable flows. Second, the regulatory regime over time has shifted from one biased against outflows towards one managing two-way cross-border capital flows in a more balanced fashion. Related to the latter is the tendency for policymakers to systemically “lean against the wind” in the sense that control measures over outflows are strengthened to resist depreciation pressures on the exchange rate and vice versa. While such a discriminated control regime may complicate any analysis, more stringent control measures over short-term flows to resist prevailing market pressures would highlight short-term interest rates as a useful measure of the efficacy of capital controls.
One factor conditioning the efficacy of capital controls is the size of external flows. Despite continued capital controls, the past two decades have witnessed a rapid rise in China’s cross-border flows on both the current and capital accounts. As a percentage of GDP, China’s gross cross-border flows more than quintupled to above 120% in 2005 from less than 20% in 1982 (Graph 1), with a noticeable acceleration in the 1990s. Also, notwithstanding the remarkable expansion of gross current account flows, China’s capital account flows have been gaining relative importance.2 In 2005, gross capital account flows represented one third of China’s total gross cross-border flows, compared with just 13% in1982 and 25% in 1990. 3
The backdrop of growing cross-border flows suggests that the Chinese economy has grown more open and integrated into the global economy and thus more prone to influences from global markets. In particular, larger external flows point to more potential opportunities to avoid and to evade capital controls. This in turn puts into question the efficacy of capital controls, with implications for both monetary autonomy, financial stability and future capital-account liberalisation.
Growing trade and financial openness, however, does not support an immediate conclusion about the efficacy of capital controls. In particular, even large and highly responsive cross-border flows may limit without gutting capital controls, just as small and stable flows need not imply effective controls. A more direct and stringent test of capital control effectiveness is whether substantial cross-border arbitrage opportunities persist for a considerable period of time. Such a test, based not on flows but on onshore and offshore prices, can also indicate how the effectiveness has varied over time. When price and flow measures are consistent with each other, one may arrive at an easy conclusion regarding capital mobility, but when they point in different directions, price evidence should be given more weight. In what follows, we examine both measures but put more weight on the price measures in gauging the degree of capital mobility.
3. Price test of capital mobility:
onshore and offshore renminbi yields
This section analyses the combination of onshore renminbi interest rates, offshore US dollar rates and non-deliverable forward (NDF) exchange rates to test for capital mobility between China and the offshore financial markets. The null hypothesis is that there are no substantial differences between renminbi interest rates onshore on the one hand and those implied by the offshore NDFs in conjunction with US dollar Libor on the other.4 The methodology of estimating such onshore/offshore renminbi yield gaps is based on Ma et al (2004), as detailed in Appendix 1. The idea is that large and persistent onshore/offshore yield gaps suggest significant cross-border market segmentation and thus binding capital controls; but occasional small gaps do not necessarily imply ineffectiveness of capital controls. We interpret the evidence as supporting the alternative hypothesis of there being an economically substantial gap between on- and offshore renminbi yields. Acceptance of this hypothesis favours the view that capital controls in China have so far remained binding.
3.1 Measuring onshore and offshore renminbi yield differentials
Especially in the case of relatively less developed money and foreign exchange markets, instruments must be chosen carefully to perform this test. Care must be exercised in the dimensions of maturity, liquidity and credit. Ideally, one wants to compare instruments of identical maturity, enjoying the same liquidity, that are issued by the same private parties, usually banks. An appropriate comparison would be between the yields on large US dollar certificates of deposit in New York versus yields on US dollar deposits posted in London by the top-rated banks that report to the British Bankers Association (BBA). Such a comparison is often based on the three-month maturity that is very representative of both domestic and offshore yields. The banks involved in the comparison are quite similar in their double-A credit standing.
3.1.1 Liquidity considerations
In the case of China, the challenge in practice has come from getting a reasonable match between a representative renminbi money market yield, on the one hand, and the NDF rate, on the other. In particular, the interbank renminbi money market trades with greatest liquidity at very short maturities – overnight to seven days, while the NDF market trades with greatest liquidity at longer tenors of three months to one year.
This paper improves on the previous estimates of onshore/offshore renminbi yield gaps in the dimension of liquidity (Ma et al (2004)). The latter traded off the above considerations and chose to compare the three-month China interbank offered rate (Chibor) yield to the three-month NDF.5 This comparison stretched to a relatively long and illiquid maturity in the domestic money market, on the one hand, and took a relatively short maturity in the offshore market, on the other. Here, we update these earlier measures as well as complement the earlier analysis with a new comparison based on a different pair of instruments. In particular we also compare the weekly auction rates for PBC one-year bills available since 2004 to the one-year NDF. This choice compares liquid instruments in both markets, although it introduces possible credit differences between the sovereign bill and the bank NDF or deposit (see below).
Liquidity across the two markets matches well at the one-year tenor. The PBC issued CNY1.2 trillion (about $150 billion) of its one-year bills in 2005 out of a total bill issuance of CNY2.8 trillion, for an average weekly issuance of about $3 billion equivalent.6 In January–March 2006, issuance ranged between CNY40 and CNY120 billion per week. In the NDF market, the one-year is reportedly the most traded maturity (Ma et al (2004), Debelle et al (2006)).
The less liquid the instruments that are used to arbitrage onshore and offshore yields, the less telling are small observed yield differences. One can think of an arbitrage tunnel inside which further arbitrage transactions are not profitable, given bid-ask spreads and any tendency for flows of orders to move the market. The upshot is that a finding that capital controls are ineffective could well be consistent with observed yield gaps of, say, 25 basis points or less.
3.1.2 Credit considerations
With regard to credit, comparing sovereign and bank yields on onshore and offshore instruments, respectively, is problematic in principle, but in practice it does not skew the comparison substantially. Credit default swaps suggest that the credit standing of China attracts an insurance payment of only a handful of basis points more than that of the major international banks that form the US dollar Libor panel (Table 1). Since offshore renminbi rates were lower than the onshore PBC bill yield in the period 2004–06, the mixing of sovereign and bank credit does widen the estimated yield gap for this period, thus favouring the finding that capital controls are effective. But as we shall see below, the scale of the estimated yield differences of 100 to 400 basis points dwarfs the 5–basis–point credit difference.
With our earlier comparison of Chibor and offshore yields, credit differences actually tended to reduce the absolute value of the observed yield differentials over much of the sample period. In 1999–2001, highly rated banks dealing offshore under international law paid higher (implied) yields than did domestic Chinese banks dealing onshore. Taking into account the credit difference would only have widened the gap.
3.1.3 An example of cross-border arbitrage on renminbi interest rates
Before examining the data, it might be useful to consider a particular example of an arbitrage transaction at the one-year tenor by a multinational firm with a profitable operation in China. Since September 2003, the offshore speculative demand to be long in renminbi has given the treasurer of such a firm a strong incentive in effect to hold renminbi onshore and to sell them forward offshore (ie lending renminbi onshore and borrowing them offshore).7 One way of constructing such a position is for the affiliate in China not to convert renminbi into dollars in order to remit a dividend to its parent outside China. Instead the funds are retained in renminbi and invested in the Chinese money market. The yield on the one-year deposit is proxied by the PBC bill rate (one can think of a bank taking the funds in trust and investing in the PBC bill). Thus, renminbi funds have been lent onshore.
Simultaneously, the affiliate borrows dollars at one-year Libor, replacing the cash flow of the unpaid dividend from China, and sells renminbi one year forward against US dollars, say to a hedge fund. This combination of dollar borrowing and forward position amounts to borrowing renminbi offshore and converting the proceeds into dollars, and the rate of interest paid is (by construction) the relatively low NDF-implied renminbi yield. At the year-end, the renminbi invested onshore can be sold for dollars at the then prevailing spot exchange rate that is also used to determine any profit or loss on the NDF, leaving the firm with the arbitrage gain between the interest rate in the Chinese money market and the lower offshore yield. Thus, by lagging a current dollar payment, namely the profit repatriation, the firm has in effect acquired a long renminbi position and locked in a gain by selling it offshore.8
One of the useful features of this example is that it shows that arbitrage between the onshore money market and the offshore forward market is not limited to banks. Of course, not all foreign firms operating in China are profitable; some have entered joint ventures that may constrain such arbitrage and not all would be willing to increase their balance sheet in China.
Nevertheless, such corporate opportunities are telling because otherwise a failure of interest rates to be equalised could be taken to be merely a symptom of the inefficiency of Chinese banks. Instead, the profit opportunities present themselves to global companies that can be presumed to bring to China efficient treasury operations and indeed the benefit of having operated within and around capital controls in other economies.
3.2 Onshore-offshore renminbi yield differentials based on three-month Chibor
As noted, our earlier analysis compared a domestic interest rate, the so-called three-month Chibor, to the offshore renminbi rate implied by three-month NDFs and dollar Libor. We found economically very significant differences. Graph 2 compares the three-month yield gap for the renminbi with Asian peers for the periods 1999–2001 and 2002–04. The absolute value of the gap between renminbi yields onshore and offshore averaged 250–300 basis points in the five years to early 2004. This placed China in the middle of our sample and indeed is very wide compared to the onshore-offshore differential of 50–100 basis points for the Korean won over the same period and a gap of 20–30 basis points observed for the yen before capital controls were lifted in the early 1980s (Otani and Tiwari (1981)). The narrowing of the differentials in 2002–04 was in fact less evident in the case of China than for most of the other Asian currencies.
An updated estimate of the yield gap for 1999–2006 reveals an even bigger average gap of 310 basis points in absolute value and also suggests several distinct phases of market conditions (Graph 3). In general, if controls bind, one would expect offshore rates above onshore rates when market participants are positioning for renminbi weakness and the net direction of flows of funds is outward; conversely offshore rates would fall below onshore rates when positioning favours renminbi strength and funds are seeking to enter China. In the period from the Asian financial crisis to early 2001, the weight of offshore positioning was in the direction of a weakening renminbi, resulting in higher yields offshore. This was consistent with China’s foreign exchange reserves growing more slowly than would be suggested by the reported current account and net direct investment balances (see Section5). Then followed a period of smaller differences during 2001-02 that saw offshore rates below those onshore but with a gap less than 150 basis points. This period featured more balanced positioning on the renminbi. With the intensification of public pressure from trading partners on China’s exchange rate policy in September 2003, however, offshore yields dropped substantially below their onshore counterparts. The weight of offshore positioning was in the direction of a strengthening renminbi. As Chinese companies converted dollar holdings or borrowings into renminbi, reserve growth accelerated, far exceeding the pace that could be explained by the current account surplus and direct investment inflows (see Section 5). The average yield gap widened to more than 360 basis points during January2003 to April 2006. The gap reached a peak of 800 basis points in mid-2005 when the implied offshore yield fell well below zero.9 But since the July 2005 policy change, the yield gap has narrowed markedly to less than 200 basis points.
The principal message based on both our previous and more updated estimates of three-month tenor of the Chibor and renminbi NDF is that the onshore/offshore gap in the renminbi yields has been persistently substantial in absolute terms and its sign has been consistent with prevailing market pressures. In other words, hitherto, China’s capital controls have prevented sufficient cross-border arbitrage to equalise onshore and offshore short-term yields.
3.3 Onshore-offshore renminbi yield differentials based on PBC bills
The above finding that offshore renminbi yields have traded consistently below those onshore over the past two years is confirmed by another test based on a newly available and more liquid benchmark money market yield in renminbi in China. As noted above, the introduction of a weekly auction of PBC bills in early 2004 has provided an alternative basis for comparison of domestic renminbi money market yields with the renminbi yields implied by the NDFs traded offshore. This more telling and updated test, covering the two and half years between April 2004 and November 2006, produces a much smoother estimate of the yield gap, consistent with better liquidity in both markets (Graph 4). 9
This more refined and updated test based on trading in liquid market segments offers further evidence of binding controls. During the period April 2004 to November 2006, the one-year PBC bill yielded on average 250 basis points more than the yield implied by the offshore，NDF. These 250 basis points compares to an average of 320 basis points based on the three-month Chibor. Both suggest two distinct phases in the yield gaps since April 2004. Before the July 2005 policy move, the gap was wider and more volatile, reacting to policy comments and market rumours. The average spread for this first phase was more than 400 basis points on both estimates. After the July 2005 policy shift, the yield gap has shrunk to100–200 basis points for three-month Chibor and the one-year PBC bill auction yields.
It is remarkable that the onshore-offshore interest differential narrowed sharply in the wake of the July 2005 policy change and has remained quite stable since. How should this recent convergence of offshore to onshore renminbi yields be interpreted? Those observers with a prior conviction that capital controls lose effectiveness in the presence of growing cross-border flows can read the reduction of the onshore-offshore renminbi interest rate differential as demonstrating their priors. This possible interpretation is simple and is supported to some extent by the flow evidence to be discussed in Section 5.
We offer a more nuanced interpretation that allows scope for both policy and temporary opportunities to evade controls. Regarding policy, we see the initial narrowing of the onshore and offshore renminbi yield differential as a chosen outcome of policy rather than as a forced outcome of the weight of money. In the approach to the depegging, the Chinese authorities doubtless appreciated the risk of a market reaction to any managed exit strategy. In these circumstances, prudence might suggest a policy of not relying too heavily on capital controls, even if these were judged generally effective. As it happened, rising US interest rates offered the option of what might be termed an opportunistic policy of uncovered interest parity. Thus, in the months before and after July 2005, the Chinese authorities widened the renminbi-dollar interest gap, by reducing the one-year PBC bill rate through policy rate cuts against the backdrop of rising US policy rates. This opened up a 3–4 percentage point gap between US and renminbi yields. Then after July 2005, the Chinese authorities shaped expectations of a3–4% annual appreciation through statements and the actual pace of the spot crawl. Indeed, market expectations seemed to have been remarkably well contained during the transition, as can be seen from the NDF markets and the implied volatility (Graph 5). The consistency of such exchange rate expectations and the dollar-renminbi interest rate differential served to keep onshore and offshore renminbi rates not too far out of line. Our interpretation suggests that the PBC de facto behaved as if interest rate parity were an operating target in setting.9
This more refined and updated test based on trading in liquid market segments offers further evidence of binding controls. During the period April 2004 to November 2006, the one-year PBC bill yielded on average 250 basis points more than the yield implied by the offshore NDF. These 250 basis points compares to an average of 320 basis points based on the three-month Chibor. Both suggest two distinct phases in the yield gaps since April 2004.
Before the July 2005 policy move, the gap was wider and more volatile, reacting to policy comments and market rumours. The average spread for this first phase was more than 400 basis points on both estimates. After the July 2005 policy shift, the yield gap has shrunk to100–200 basis points for three-month Chibor and the one-year PBC bill auction yields. It is remarkable that the onshore-offshore interest differential narrowed sharply in the wake of the July 2005 policy change and has remained quite stable since. How should this recent convergence of offshore to onshore renminbi yields be interpreted? Those observers with a prior conviction that capital controls lose effectiveness in the presence of growing cross-border flows can read the reduction of the onshore-offshore renminbi interest rate differential as demonstrating their priors. This possible interpretation is simple and is supported to some extent by the flow evidence to be discussed in Section 5.
We offer a more nuanced interpretation that allows scope for both policy and temporary opportunities to evade controls. Regarding policy, we see the initial narrowing of the onshore and offshore renminbi yield differential as a chosen outcome of policy rather than as a forced outcome of the weight of money. In the approach to the depegging, the Chinese authorities doubtless appreciated the risk of a market reaction to any managed exit strategy. In these circumstances, prudence might suggest a policy of not relying too heavily on capital controls, even if these were judged generally effective. As it happened, rising US interest rates offered the option of what might be termed an opportunistic policy of uncovered interest parity. Thus, in the months before and after July 2005, the Chinese authorities widened the renminbi-dollar interest gap, by reducing the one-year PBC bill rate through policy rate cuts against the backdrop of rising US policy rates. This opened up a 3–4 percentage point gap between US and renminbi yields. Then after July 2005, the Chinese authorities shaped expectations of a 3–4% annual appreciation through statements and the actual pace of the spot crawl. Indeed, market expectations seemed to have been remarkably well contained during the transition, as can be seen from the NDF markets and the implied volatility (Graph 5). The consistency of such exchange rate expectations and the dollar-renminbi interest rate differential served to keep onshore and offshore renminbi rates not too far out of line. Our interpretation suggests that the PBC de facto behaved as if interest rate parity were an operating target in setting interest rates and the speed of the crawl, thereby possibly lowering the risks inherent in the regime transition. This approach reduced the reliance on the considerable capital controls still in place, albeit to some extent at the cost of relying more on the non-interest rate instruments of monetary policy.
There were also temporary opportunities to evade the capital controls that arose because of the lag between market development and the articulation of capital controls. In particular, the development in 2006 of an onshore forward market might have added a new channel for inflows that helped to narrow the onshore-offshore differential. An onshore renminbi forward market was first introduced in late 2005, in which the forward rates were primarily priced by differentials between onshore interest rates and US dollar interest rates and made available mainly for hedging for real underlying transactions. This onshore forward market allowed some players with a presence in both the onshore and offshore markets to arbitrage. In particular, such players could buy renminbi forward in the onshore market (at relatively high implied interest rates) and simultaneously sell renminbi forward in the offshore market (at relatively low implied interest rates). Much like borrowing renminbi offshore and placing renminbi onshore, such transactions would tend to raise the offshore interest rates towards domestic interest rate levels, bringing the onshore and offshore forward curve closer to each other than otherwise. Such transactions were apparently made possible by a lacuna in the onshore prudential regulation of net foreign currency positions for banks, which set limits on net spot but not forward positions. In response to the resultant inflows, the Chinese authorities in the third quarter of 2006 tightened the rules, to prohibit onshore institutions from participating in the offshore NDF market and to include forward positions in the new prudential regulations on net bank foreign currency positions. In effect, the development of the onshore forward market created a temporary channel for arbitrage, though not one wide enough to raise offshore rates to domestic levels.
In sum, the wide differences between onshore and offshore renminbi interest rates point to the efficacy of capital controls. Most recently, the Chinese authorities guided domestic interest rates and expectations of appreciation into broad consistency with rising US dollar interest rates to reduce the risks inherent in the initial exchange rate regime shift. The resulting 1 percentage point gap between onshore and offshore renminbi yields might have been desired in order to lessen the policy burden on capital controls, which have been binding but not watertight.
Going forward, developments may once again widen the gap between onshore and offshore renminbi rates and put capital controls to a stronger test. For one thing, the accelerated pace of spot appreciation since mid–2006 might condition market expectations. Indeed, the onshore/offshore yield gap widened again to 200–300 basis points in January 2007 as offshore rates returned to zero. The experience with the onshore forwards in 2006, however, suggests that maintaining effective capital controls gets harder with the development of financial markets and further deregulation of cross-border transactions.(未完）
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