China's still relatively closed financial system could become fully liberalized over the next decade, which will have a sizeable impact on the shape of the global financial system, the Bank of England has suggested.
In a quarterly bulletin, the BoE said that if the People's Bank of China liberalized the country's economy by 2025, as it has suggested, this would increase China's international investment position relative to the size of the world economy from 5 percent of world gross domestic product (GDP) today to 30 percent in 2025. That is similar to the current U.S. position, thus making China an equally dominant economic superpower.
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"The global financial integration of China has the potential to be a force for economic growth and financial stability not just in China but also globally," writes John Hooley of the BoE's International Finance Division, adding, "The U.K. economy is likely to be relatively more affected than most due to its large and open financial system and existing strong financial linkages with China."
Prime Minister David Cameron and Chancellor of the Exchequer George Osborne have both travelled to China in recent months to drum up investment between the two nations. The BoE notes that U.K. banks' claims on mainland China are larger than any other banking system's, both in absolute terms and relative to capital.
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China would of course benefit, with the removal of restrictions on outflows allowing Chinese companies and households to diversify their pools of savings by investing in overseas assets, reducing the need for precautionary saving and free up income for current spending.
This in turn would aid the global economy. If China's financial walls are lifted, some of its vast pool of domestic savings will migrate into global capital markets, providing a significant boost to liquidity," the note said.
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However, the BoE bulletin also stressed that liberalization was not without its risks and that both national authorities and international bodies would need to monitor the change. Hooley's note said that the BoE was "working closely with the People's Bank of China regarding the development of offshore renminbi activity in the United Kingdom and will continue to look for other ways to support a successful integration of China into the global financial system."