Effectiveness and Effects of China＇s Capital Controls

Reductions in barriers to global trade have not been accompanied by a widespread loosening of restrictions on international flows of capital, especially in China. This study shows that China has some of the most restrictive controls and uses them effectively to bias flows of cross-border capital heavily in favor of foreign direct investment (FDI) and limit flows of portfolio and bank assets and liabilities, as well as reducing capital flow volatility. China is now facing pressure to speed up its opening to all forms of cross border capital. But since China is still struggling to strengthen its domestic financial structure, capital account liberalization would expose it to considerable risks and potentially high costs.