Seppo Honkapohja: Financial liberalization in China
Opening remarks by Mr Seppo Honkapohja, Member of the Board of the Bank of Finland, at
the Conference on financial liberalization in China, Helsinki, 18 September 2014.
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Continuation of China's economic growth and integration with the rest of global economy has
increased its importance for other economies. Increased trade ties and their effects on China
and the rest of the world are certainly one major area for economic research. We economists
often feel that increased trade in real goods and services is relatively straight-forward topic to
understand. However, this trade is only part of increasing economic integration. Very
recently, China's increasing financial integration has become a new and important challenge
for both policy makers and research. Given the size of the Chinese economy, the
consequences of its financial integration with the rest of the world are potentially very large.
Financial liberalization is a much more encompassing development than just technical lifting
of controls. Market-based financial systems contain new risks and uncertainties when
compared to tightly controlled systems. The behavior of financial institutions in a liberalization
process involves major challenges as the market participants learn to understand their new
operational environment. A competitive financial system affects the effectiveness of banks
and other institutions and they must be ready to carry out efficiency-enhancing reforms in
order to cope with the new business environment. Strengthening of the capital base and
reforms of supervisory systems are important ingredients to the process of financial
liberalization.
Let me mention one specific topic that is fundamental in the process of financial
liberalization. Freeing of cross-border capital flows poses a specific challenge to
macroeconomic policy making. As is well known, it is not possible to control simultaneously
amount of domestic finance, interest rates and the exchange rate of a country's currency.
The so-called impossible trinity must be respected when capital flows are free and finance is
market-based.
More generally, financial liberalization poses are a large number of other questions for
research and policy making. I am happy to see that so many top researchers in the field have
traveled to our conference to discuss the various topics. Obviously the whole phenomenon of
financial liberalization is very multi-faceted, ranging from integration of offshore and onshore
currency markets to development of China's own capital markets and to issues of
international finance. All of these areas are important, and they are also potential sources of
financial instability, if things do not go as well as is now planned.
I am sure conference presentations and discussions will provide us all with valuable insights
into possible consequences of China's financial liberalization, both for China itself and for
others as well. Given the size of the Chinese economy, other countries should monitor the
developments. It is my pleasure to open this conference and welcome you to the Bank of
Finland.