Capital account openness and the sustainability of the balance of payments structure

Author: Jiang Bok
Publisher:
Publish Date: 2005-11-01
Features: With the continuous expansion and deepening of China's opening-up to the outside world, balance of payments issues have increasingly become a crucial factor affecting China's economic stability and development. Before the liberalization of the capital and financial accounts, balance of payments issues were primarily reflected in the current account balance within the balance of payments, with the main focus being on whether the trade account was in balance. As the capital and financial accounts continue to open, China's external equilibrium issues have become increasingly complex. On one hand, the liberalization of the capital and financial accounts has led to capital flows in the trade account and even the current account that are not directly related to foreign direct investment, making the overall balance of payments and its structure more difficult to predict and control, and thereby affecting the simultaneous achievement of internal and external equilibrium and economic stability. Against this backdrop, this book explores the sustainability of the balance of payments structure under capital account liberalization. The definition of a sustainable balance of payments structure is that, without resorting to measures that harm internal equilibrium, a deficit in one account can be offset by a surplus in another, and a deficit in one period can be offset by a surplus in another period. This book analyzes the interplay mechanisms and compensatory relationships between four major accounts: the goods trade account, the services trade account, the investment income account, and the foreign direct investment account. Based on China's national conditions, it proposes a way to enhance the competitiveness of goods trade by combining the introduction of foreign direct investment with the cultivation of industrial clusters. After reviewing the theory of intertemporal compensation for the current account based on consumption smoothing, we find that this theory is not very applicable to developing countries.