Given the evidence that capital account liberalization increases macroeconomic volatility, many developing countries have experimented with capital controls.

History is littered with financial crises occurring in the wake of precipitous capital account liberalization.

During the 1990s, capital account liberalization and high capital account volatility greatly increased the need for official liquidity to deal with sudden and large reversals of flows.

As such, the timing could not be worse to float the idea of speeding up capital account liberalization.

Most economists in China seem to support the PBOC s stance, citing the potential benefits of capital account liberalization.

To be sure, a cautious approach should not be allowed to impede incremental progress toward capital account liberalization.

Both had resisted capital market liberalization.

Second, much will depend on how China navigates the transition to a more open capital account. History is littered with financial crises occurring in the wake of precipitous capital account liberalization.

Although currency internationalization is not tantamount to capital account liberalization, progress on the former presupposes progress on the latter.

The fundamental problem was premature capital market liberalization.

Financial markets did well through capital market liberalization.

E. The international environment Financial liberalization and capital flows

Most economists in China seem to support the PBOC s stance, citing the potential benefits of capital account liberalization. But Chinese policymakers should also recognize the significant risks inherent in relaxing capital controls.

Progress on further structural reforms such as currency and capital account liberalization and weaning state controlled industries off state capital has been slow, and new initiatives have been piecemeal rather than comprehensive.

And yet, despite abundant academic evidence and country experience to the contrary, the IMF remains stubbornly wedded to the idea of eventual capital account liberalization.

Furthermore, in certain developing countries, capital account liberalization has enabled companies to invest abroad, while Governments stimulated outward FDI by offering fiscal and other incentives.

But China slowed capital account liberalization after the Asian financial crisis ten years ago, so it is possible that America s troubles could make China more cautious.

In early 2012, the People s Bank of China (PBOC) released a report calling for policymakers to take advantage of a strategic opportunity to accelerate capital account liberalization.

As a result, market oriented interest rate reform is now needed to help optimize capital allocation and support the development of China s financial market, thereby laying the groundwork for future capital account and exchange rate liberalization.

The Temptation of China s Capital Account

Working Capital Fund and Special Account

This issue was settled in 1997, when then IMF Managing Director Michel Camdessus tried to include some commitment to capital account liberalization in the Fund s Articles of Agreement.

Financial liberalization would attract foreign capital seeking high returns in capital scarce countries, allowing them to invest more than they saved.

As such, the timing could not be worse to float the idea of speeding up capital account liberalization. On the contrary, the Peoples Bank of China (PBoC) and other relevant authorities should consider capital controls, market suspensions, and emergency liquidity provision.

Pushing for greater capital market liberalization after the debacle of the 1990 s will be controversial.

They have the potential to seriously impede trade liberalization and deter the international flow of capital.

A. GENERAL FUND, WORKING CAPITAL FUND AND SPECIAL ACCOUNT

While some measures that the PBOC has taken under the banner of capital account liberalization have turned out to be both necessary and appropriately moderate, others may need to be reassessed and rescinded.

True, private capital flows have surged in the wake of global liberalization and these countries privatization schemes.

In particular, the IMF now recognizes that capital account liberalization requires countries to reach a certain threshold with respect to financial and governance institutions, and that many emerging market and developing countries have not.

A significant contributory factor underlying the financial crises was the premature liberalization of capital accounts in many countries.

Financial sector policy efforts thus emphasize institution building, including capital market development, along with liberalization of administrative controls.

But any further move toward interest rate liberalization must account for all potential costs and benefits.

In early 2012, the People s Bank of China (PBOC) released a report calling for policymakers to take advantage of a strategic opportunity to accelerate capital account liberalization. Shortly after the release, QFII quotas were relaxed significantly.

Even the IMF now recognizes that capital market liberalization has delivered neither growth nor stability to many developing countries.

The liberalization of financial markets has made it easier for larger SMEs to gain access to international capital markets.

In fact, many emerging markets experienced declines in investment rates. Nor, on balance, has liberalization of capital flows stabilized consumption.

Ironically, bad memories of the IMF s first, premature attempt to promote long term capital market liberalization remain an obstacle today.

Kaduang has posted an eyewitness account of yesterdays happening in capital Yangoon.

It is time to add managing the capital account to this list.

This is why capital account regulations are allowed under IMF rules, and why the attempt to introduce capital account convertibility into the IMF s Articles of Agreement was defeated in 1997.

That is what happened in the second half of the 1990 s, as the IMF began to preach capital account liberalization, applied over stringent fiscal remedies during the Asian financial crisis, and single handedly tried to reshape Asian economies.

Developing countries' alleged gains from capital market liberalization have been widely discussed (although recent studies raise some doubts about these benefits).

General Fund cash flow (usable cash), including Working Capital Fund and Special Account

Subsequent research by the IMF has confirmed what every serious study had shown capital market liberalization brings instability, but not necessarily growth.