The Opening of the Capital Account and the Full Convertibility of the RMB

Abstract

According to Mundell’s “Impossible Trinity,” the three corner solutions to the “Trilemma” are equal. This theory explains that one of the three corner solutions must be abandoned for the remaining two to remain. This theory does not, however, explain the reasons behind this choice. As previously mentioned, due to variations among countries’ differing social and economic developments, different choices will arise. Developed countries can select a financial portfolio as they like, but there is one pre-condition for most developing countries: they should have a controllable capital flow. In other words, opening the capital account and enabling the free movement of capital is of deep significance to developing countries. The process of pursuing domestic industrialization, however, is restricted by the larger goal of achieving a low capital cost. The opening of the capital account has therefore become a historical difficulty.