It would be better to help Mainland residents move their foreign currency out of the Mainland in a safe and orderly way than to try to restrict them.
Money, like water, very often finds a way to flow around obstacles blocking its path. When there is strong demand for capital to move across jurisdictions, trying to restrict it will often just drive the flow underground, where malpractices prevail to the detriment of the interests of those having, possibly quite legitimate, needs for the movement of funds. Quoting an old Chinese saying: "the sky wishes to rain and mom wishes to remarry", some people may throw up their hands and say that there is no way of stopping underground flows altogether. I would say that building proper facilities to channel such flows, so that they no longer need to go underground, is a better and more constructive approach than trying to restrict them.
Perhaps I do not have a very good understanding of the regulatory framework governing the mobility of an individual's money on the Mainland. We all have to develop a better understanding of the policies and practices of China's socialist market economy. There are of course complex issues involved, including the all-important macro-economic objective of maintaining monetary and financial stability, protecting the interests of depositors and investors, the legitimate desire of an individual to achieve higher, risk-adjusted return (according to his own calculations) for his savings, and the unquestionable right of the individual to withdraw money from his bank account and spend it.
The maintenance of monetary and financial stability is a very important policy objective, given its importance to the sustainability of economic growth and development. There is scope for difference of opinion about what monetary and financial policies should be pursued at this time on the Mainland. Some still feel that there is a continuing need for fairly tight exchange controls on capital-account transactions. Others point to the enormous liquidity in the financial system on the Mainland, as a result of the large current-account surplus and the rapid accumulation of foreign reserves, and think that now is the time for the relaxation of capital controls. Indeed, the high inflation rate and the appreciation pressure on the exchange rate suggest that relaxation may be overdue. But there is obviously a need to emphasise controllability, gradualism and the ability to take the initiative in financial reform and liberalisation. To the extent that there is consensus, this seems to be in favour of the orderly outflow of capital. It seems, to me at least, that meeting the desire of individuals to invest overseas in an orderly manner is a policy well worth pursuing.
A distinction can perhaps be made between the mobility of capital across different currencies, for example, from the renminbi to the Hong Kong dollar, and the mobility of capital denominated in the same currency across different jurisdictions, for example from the Mainland to Hong Kong. While there is a need for greater care on the former, one should feel a little more relaxed on the latter. After all, for individuals who already have foreign currency, it seems a little harsh to limit them to holding it in the banking system on the Mainland in the form of deposits earning low interest, instead of allowing them to move their own foreign currency to other jurisdictions where there are investment avenues promising a higher rate of risk-adjusted return. Allowing individuals to move their own money, already in the form of foreign currency, for example Hong Kong dollars, into Hong Kong, may of course increase their demand for foreign currency. But this is precisely what we all would like to see on the Mainland, to address the rather unusual macro monetary environment there. Controllability is still high, given the current restriction on conversion from the renminbi into foreign currencies to an amount equivalent to US$50,000 per person per year.
The choice of investment is a matter best left to the individuals. Everyone has a different risk-return preference, and it is not the role of the authorities to decide for individuals how they should invest their money. Such an involvement of the government creates tremendous moral hazard that should be avoided. At the same time, there is no doubt that investors, particularly the smaller ones, do require protection. That is why there are arrangements for the protection of investors, such as the disclosure requirements imposed on fund raisers and financial intermediaries, regulation of financial markets and the supervision of financial institutions. This is an area in which Hong Kong is very strong, possibly at the forefront of international standards, although admittedly against a capitalist, free-market economic background. But I would argue, in terms of investor protection, that what is good for Hong Kong investors should also be good for Mainland investors. If it is considered that Mainland investors making such cross-border investments require more protection, a threshold for the amount of money that an individual is allowed to invest overseas could be imposed so that the channel is only available to larger and more sophisticated investors.
Joseph Yam
29 November 2007
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