1. Capital account liberalization and the possibility of a surge of capital outflows, which could destabilize the financial system as well as the overall economy.
2. There are concerns on China’s financial system, including the stability of the banking system, wild swings in the stock market, and a large shadow banking system.
3. China’s policy making are too in doubts concerning the possibility of policy missteps in the process of the difficult and risky transition from a largely command-driven economy to a market-oriented.
THE CAPITAL ACCOUNT
1. Developing economies have faced crises when they opened up their capital accounts without having a market-determined exchange rate and a well-functioning financial system.
2. However foreign direct investment and portfolio equity together account for 70 percent of China’s external liabilities. This structure of liabilities is safer than one dominated by foreign currency debt.
3. China’s net foreign assets amounted to $1.6 trillion at the end of 2015, implying that it has enough foreign assets to more than cover all of its foreign liabilities.
4. The government's approach to control the volume of capital flows in both directions creates tensions that show up in large and volatile movements of capital.
CAPITAL OUTFLOWS AND CAPITAL FLIGHT
1.Capital flow surges in one direction or another can be exacerbated if the exchange rate is not allowed to adjust freely, and speculative pressures on the currency start building up. Outflows would put pressure on the PBC to expend a significant portion of its reserves to keep the RMB’s external value stable.
2. Many emerging market economies have faced balance of payments crises following a rapid rundown of foreign exchange reserves. China’s stock of reserves still remains high by traditional metrics such as coverage of imports or external debt.
3. The IMF calculates a composite metric of reserve adequacy that takes into consideration potential capital flow volatility such as Chinese households and corporations withdrawing bank deposits on a massive scale and transfer the money abroad. By this measure, China had one and a half times the adequate level of reserves.
4. Illicit capital flows are a particular concern for financial stability as they bypass traditional channels that the government can control. China’s unrecorded capital account or current account transactions amounted to $140 billion in 2014 and in 2015 they were $132 billion.
5. An alternative channel for capital flight is related to informal financial institutions that act as conduits for cross-border transfers. In September 2015, authorities discovered 37 underground banking dens accounting for deals totaling more than $38 billion and cracked down on an illegal foreign-exchange network that it said handled up to $64 billion in transactions.
DEBT BURDEN
1. The level of gross debt in 2014 was 282 percent of GDP. This includes government debt (55 percent of GDP, similar to the IMF’s estimate) and debt owed by financial institutions (65 percent of GDP) with substantial portion of outstanding loans has gone to large SOEs, nonfinancial corporations (125 percent of GDP), and households (38 percent of GDP). More recent estimates suggest that corporate debt may have risen above 150 percent of GDP by early 2016.
2. Corporations that have borrowed too much could result in bankruptcy or painful restructuring however The government, on the other hand, has a large trove of assets—including its foreign exchange reserves, ownership stakes in the state enterprises, and foreign investments through the sovereign wealth fund.
