RDP 2014-10: Financial Reform in Australia and China 5. Concluding Remarks

China today faces markedly different domestic and global circumstances than Australia did in the late 1970s and early 1980s. The relevance of the Australian example for China is that it underscores the potential catalytic effects on financial development of a decision to liberalise. Moreover, it suggests that the full benefits of a complete financial deregulation – encompassing deregulated interest rates, an open capital account and a floating exchange rate – may only be felt once the system has adapted to changed arrangements and the credibility of the post-reform policy framework and institutions has been established.

The specific sequencing of deregulation that occurred in Australia might not be optimal in a Chinese context. In several respects, China is now at a more progressed stage of reform than Australia was in the late 1970s, particularly with respect to the development of its financial system, including its hedging markets and prudential regulation framework. Broadly speaking, the Australian experience tends to support the conclusions of Johnston (1998) and Ishii and Habermeier (2002) – namely, that reform creates its own momentum. Domestic financial deregulation can create additional channels for capital flows, making capital controls less effective and creating pressure for their removal. By the same token, capital account liberalisation may increase the urgency of broader financial sector reforms to deal with the increased capital flows. Either way, the path to reform is not without its risks and the stakes are undoubtedly higher for China (and the world) today than they were for Australia in the early 1980s.