Capital Account Liberalization in China

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This paper considers the costs and benefits, if any, of short-term cross-border capital flows. It argues that short-term capital flows may be regulated with the introduction of a Tobin tax that applies to both inbound and outbound capital flows but not flows associated with current account transactions. It is shown that with such a Tobin tax, the “Impossible Trinity” becomes possible. Capital account convertibility for China and market determination of the exchange rate of the Renminbi may be accelerated if a Tobin tax is adopted and implemented.