IT CERTAINLY IS refreshing to see the honesty with which Vice-Premier Wen Jiabao has addressed that vexed question of how long it will take China to open its capital account. It will take a long, long time, he said in so many words at an economic seminar in Beijing on Friday and, coming from a man believed to be the premier-in-waiting, we can take that as official policy. Of course, he did not say it in plain speech. That would be too much to ask. Instead he called for a 'gradual approach' and mentioned worries about the negative impact of short-term speculators on financial markets as well as the political and social unrest to which their activities could lead. 'The prerequisites for the prudent opening of capital accounts should include a good climate for economic development . . . a sound financial system and effective financial supervision,' he said. Let us take that back to front. The accounts this newspaper carries almost every day of dubious corporate doings in the mainland tell you that effective financial supervision is still a dream. Ditto a sound financial system. It is a good question whether the mainland has a financial system at all, let alone a sound one. You might say the criterion of a good climate for economic development has been met, but if worries about what speculators can do to it are even in part to be taken into consideration then officialdom has reason to put it off forever and this leads to Mr Wen's 'gradual approach', which I take as standard political doublespeak for 'not over my dead body'. I call this honesty because it implicitly recognises that opening the capital account is not just one of a series of financial reforms, like opening a stock market or introducing a bankruptcy law. It is the ultimate big change. It strikes at the heart of state planning of anything. To introduce it is formally and officially to declare any remaining notion of communist philosophy dead. Think about it. An open capital account would allow everyone in the mainland to convert yuan to other currencies and invest it anywhere in the world they please. It would also allow them to take money back into China but you know full well the trend would be the other way initially and for a long time after. This would immediately confront Beijing with the question of whether to let the yuan float or continue fixing its exchange rate. If it chooses the first it loses control of the currency. If it chooses the second it loses control of interest rates. They would be subject to market forces determined largely by the free inflow and outflow of capital. This would mean that the state itself could embark on no projects with any certainty of cost or availability of finance. If it is not prepared to pay the market rate for finance the money will go to other projects. If it forces the issue and demands the money from its citizens at the rate it chooses they can simply ship the money abroad out of its reach. If it then attempts to stop them from doing so it will have to re-introduce capital controls and that will be the end of an open capital account. In short, a country that opens its capital account makes the man on the street the arbiter of where money should go and takes that power away from government. It forces government to subject its operations to market forces and is the most far-reaching financial reform that any country can make. It is the final one in the dissolution of centrally planned economies. Although Mr Wen did not express his reluctance to an open capital account in these words, I think his remarks show that he knows this and knows China is still a very long way away from taking this ultimate step.
