Abstract:

China's asymmetric capital control during the process of opening its capital account, as well as insufficient liberalization of its economy, is reflected in the Mundel-Flemming model with the slope of BP line in M-F model bigger than LM line.Therefore, effects of monetary policy, fiscal policy and exchange rate policy will be weakened under a fixed exchange rate regime in terms of their adjustment to balance of payment.An adoption of a flexible exchange rate regime, however, will greatly enhance those effects.As a result, China is advised to proceed with opening its capital account and speed up liberalization of the interest rate and exchange rate system so as to heighten effectiveness of adjusting to its balance of payment.

Key words: capital account opening, balance of payment, M-F model