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The author Shi Jianhuai is a professor with the China Center for Economic Research, Peking University. The article was originally published in Economic Observer

Since China has made the renminbi convertible for its current account for a decade, liberalizing the capital account becomes an increasingly pressing issue for the country.

Financial globalization has evolved to such an extent since the 1990s that the international currency trade is more than 100 times the commodity trade.

The flow of financial assets across borders is gaining an increasingly important position in world economic development. International financial transactions have taken the place of international trade as the powerhouse for global growth.

Against such a backdrop, it is easy to understand why Chinese administrative control of the capital account is being strained.

Liberalizing the capital account would also help China promote reform in several key aspects.

As required, China's financial sector fully opened after the five-year transition period for its World Trade Organization membership came to close in 2006. When the foreign-invested commercial banks, insurance companies and investment banks offer financial products and services to clients in China, cross-border capital flows are inevitable.

The huge capital flows will mean a heavy workload for the authorities in charge of capital account control. Meanwhile, the control will probably prevent the country from enjoying the full benefits from the financial opening-up.

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China's economy depends heavily on the outside world after three decades of opening-up. The total volume of commodity imports and exports amounted to $1.76 trillion in 2006. The size of the trade involves massive risks in the country's balance of international payments.

China's giant trade surplus means that China gains more money from the commodities it sells than it spends. Because of the closed capital account, all foreign currencies from the trade surplus must be sold to the central bank.

Thus, the central bank becomes the major holder of the foreign currency and the State is pressured for holding the massive amount of money.

If this right is divided among numerous private owners, they would manage it with greater efficiency and flexibility. But this perspective is only possible with a liberal capital account.

More cash in renminbi is used in payment and trade settlement with other countries. But the Chinese monetary authorities are reluctant to make renminbi an international currency for fear of possible shock to the economy in case overseas renminbi cash is brought into China.

Such fear will be unnecessary if China opens its capital account. Then the money circulating overseas will mainly be in bank deposits and not in cash so will not have much influence on the domestic money supply.

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