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Open China's capital account, save the slumping stock market

  • Editorial
  • 2012-12-02
  • 14:05 (GMT+8)
A woman in a stock trading center. (Photo/Xinhua)

A woman in a stock trading center. (Photo/Xinhua)

China's stock market, which has been in a downward spiral for the last five years, continued slipping following the conclusion of the 18th National Congress of the Communist Party of China. The Shanghai Composite Index fell below 2000 points on Nov. 27, before shedding another 0.89% the next day. In view of the country's uncertain economic outlook, there are multiple variables at work in the country's capital market.

The Shanghai Composite Index was hovering around 1100 points in 1998, but shot up 400% during the next decade. After hitting a peak at more than 5900 points in 2008, it started dropping and is currently at below 2000 points, a level seen about 12 years ago.

While China's economy has churned ahead during the last five years, its stock market stubbornly refuses to follow.

Although the Shanghai stock market bubble and the market decline are closely related to China's economic development, economic growth and the financial market's growth are two separate things. While the augmented status of the country's stock market before 2007 partially reflected its economic advancement, the development of China's financial sector will be far more crucial to the next stage of its economic development. Therefore, the governor of China's central bank has called for opening a capital account, as this would be a key factor affecting the future rise or fall of the stock market.

Many countries opt to close their capital accounts to maintain foreign exchange reserves and financial stability during the initial period of economic development. The fact that China is currently the world's second-largest economy, has huge foreign exchange reserves and is one of the biggest trading countries globally, should speed up the process of opening its capital account. That will help distribute the risks related to holding such sizeable foreign-exchange reserves.

Taiwan opened its capital account in 1987 when its total trading volume was one-fifth of its current volume and its foreign-exchange reserves were about US$50 billion, which is one-eighth of the current level. Its stock index was trading below 4000 points, equivalent to half the average level seen over the past two years.

Compared with China, Taiwan opened up its capital market earlier. However, this did not cause any drop in foreign trade or foreign-exchange reserves, while its economy has grown by more than 300%.

Given China's large economy, brisk trading activity and the growing influence of its currency in global capital markets, any hesitation in opening its capital account might be detrimental to the development of its stock market.

Stock markets in various countries are an indicator of economic health. If a country lacks a healthy stock market, its economic development will be hindered. After the conclusion of China's first stage of economic growth, direct foreign investment will fall and the stock market will become a major channel for attracting indirect investment. While China is stepping up its anti-corruption campaign, opening its capital account quickly would help it make the big leap towards becoming a developed country. Otherwise, its cumbersome financial system will continue to hamper its overall economic growth.

Who's Who

  • Li Yuanchao (李源潮)

    Li Yuanchao (李源潮)

    Li was named vice president of the People's Republic of China in March 2013, an appointment that was seen as a consolation for missing out on a ...