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May 26, 2015

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Bernanke warns about two-edged sword

CHINA should ensure a healthy banking system as it seeks an open capital account and globalizes the yuan, former Federal Reserve Chairman Ben S. Bernanke said yesterday.

“An open capital account is a two-edged sword. It allows foreign investment to come in and boost growth but it would also lead to short-term capital flows that can be disruptive if the economy is not strong enough,” Bernanke said at the Shanghai Forum organized by Fudan University.

“Having a sound banking system that is well-overseen by financial regulators will help China to deal with situations when capital flows out and avoid currency mismatch.”

China is liberalizing the capital account with the launch of a stock trading link between the Shanghai and Hong Kong exchanges last year, followed by cross-border sales of investment funds between the mainland and Hong Kong.

It has also pledged to ensure full convertibility of the yuan and to improve the currency’s global influence.

“In the near term, the US dollar will remain the reserve currency because of the depth of the market and the size of the US economy,” Bernanke said

He said that for the yuan to be international, China needs a very liquid market so that people can sell and buy the currency through various financial instruments as easily as they now trade in the US dollar.

Bernanke also said China’s efforts to make the yuan as one of the International Monetary Fund’s special drawing rights currencies is symbolic and won’t affect much the life of average people.


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