Comments on Daili Wang “Taking the middle road to capital account liberalisation in China”, 12/02/2014, http://www.eastasiaforum.org/2014/02/06/taking-the-middle-road-to-capital-account-liberalisation-in-china/I share some agreement with the following argument by Daili Wang: "Capital account reforms should be accompanied by the introduction and the enforcement of an adequate degree of regulation and supervision. Inflows of foreign direct investment are broadly considered to result in net benefits. Nevertheless, this investment has potential negative effects, such as inhibiting local entrepreneurship and causing irreversible environmental damage. Authorities must create regulation and supervision about the type of inward investment that will maintain China’s competitiveness and guard its national interests."
The same spirit may also apply to outward capital flows.
However, it is important to balance the daily efficiency of capital markets and the prevention of potentially large destabilisation and/or destruction of speculative forces and in the case of panic. This is no different to banking where government may need to step in at times of crisis, say for deposit guarantee, but it may take a quite different form.
Such a balance requires well designed provisions in capital account regulation that has some built in mechanisms to prevent crises but does not affect daily operation of the capital account.