New Interpretation Of Currency Convertibility And Limited And Directional Opening Of Capital Account

The original meaning of currency convertibility refers to the commitment of the issuers of paper money or credit currency (commercial banks and later central banks) under the gold standard system to exchange freely between money and gold.

The issuer's commitment to currency convertibility provides a solid material basis for the circulation of paper money or pure credit currency.

The gold exchange standard system was introduced at the economic and financial conference held in Genoa, Italy in 1922.

The essential difference between the gold exchange standard system and the gold standard system is that the free convertibility of the currency has been replaced by the limited exchange of the currency.

In 1976, the IMF twenty Committee of the Mecca conference reached a gold non monetary agreement.

What is the meaning of "currency convertibility" under the background of non monetary monetization? Taking into account the original meaning of currency convertibility of gold, the official documents of international organizations or governments no longer mention currency convertibility.

Our understanding from theoretical analysis and international experience is that the significance of the internationalization of sovereign money is still the connotation of monetary material base and market paction basis extended from the original meaning of currency convertibility.

We have put forward the following four new meanings for the free exchange of money after the non monetization of gold:

(1) free convertibility means currency stability or inflation control within the social affordability.

This means that the exchange rate and free convertibility conditions between the currency and the commodity with value in use are relatively stable. (2) the law can effectively protect private property.

First, money is the most basic form of wealth.

Secondly, private assets are priced in currencies. (3) the issuing countries have strong ability to produce and export tradable goods, so as to ensure that the international currencies of the overseas holders have corresponding material support; the currencies in circulation are essentially the liabilities of the issuers, and they need the tradable goods they produce; (4) the currency has the convenience or low cost for foreign holders.

Thus, it is rather one-sided and narrow understanding to equate the free convertibility of money with the full liberalization of capital account.

Our research on the openness of G20 capital projects has found that the international currencies such as the US dollar and the pound have already been freely convertible, but their capital account openness is not as high as we think.

Moreover, in recent years, G7 capital account liberalization has come down.

Since 1967, AREAER has published a two yuan measurement index of capital account openness each year to describe the regulation of multinational capital pactions in member countries.

According to IMF data, the openness of UK is the highest in G20, and 1 direct investment in the first 11.

Canada, South Korea and Italy tied for second, each with two controls.

Russia and France share the same third place, each having the same four controls.

What surprises us most is that the United States has controlled 7 items in the first 11.

China, India and other emerging market powers are highly regulated.

The G20 corresponding index of FraserInstitute's capital account freedom in Canada shows that the index is 10 full score, and the developed countries maintain a high degree of freedom during 1980~2000.

The degree of freedom in Britain and Germany is at a high level of 9~10, and the United States and Canada maintain above 8 points.

But since the beginning of this century, the degree of freedom of capital account of G7 has dropped.

We find an important finding from the above capital account openness that free convertibility under monetary capital and capital account liberalization are not exactly the same thing.

Obviously, the US dollar, the euro, the pound and the yen as the international currency should have realized the convertibility under the capital terms (i.e. withdrawal from administrative control). However, we can find from the above capital account freedom degree that there are many capital account controls in the United States, Japan and Europe.

Therefore, we need to distinguish between free convertibility of RMB capital account and capital account liberalization.

An important judgement can be drawn from the analysis of the above international experience, that is, the RMB convertibility corresponds to the withdrawal of administrative control, but it does not mean abandoning the management of capital account access.

Only management tools will be pformed from traditional administrative means with Chinese characteristics into international common legal and economic means.

In particular, access to capital market can still be managed through legal (negative list), QFII (RQFII), Tobin tax, high ratio of statutory reserve requirements and other legal and economic means.

For example, foreign companies invest or buy in the US.

The US Department of justice can veto these investment activities on the basis of their negative list in order to threaten national security or form market monopoly.

In addition, Tobin, the famous economist of the United States and Nobel prize winner of economics, proposed a proposal to tax the foreign exchange market in 70s of last century to suppress short-term capital flows.

It can be seen that the convertibility of RMB capital account is actually the process of Chinese government's management of capital account from administrative means to legal and economic means.

The free convertibility of the RMB and the opening up of the capital market largely depend on our ability to manage capital in and out through legal and economic means, which we need to strengthen.