Evolution of IMF’s Policy on Cross-border Capital Flows

In April 2022，the International Monetary Fund (IMF) released the Review of the Institutional View on the Liberalization and Management of Capital Flows (hereinafter referred to as “the Review”) as an update of its 2012 The Liberalization and Management of Capital Flows: An Institutional View (hereinafter referred to as “the Institutional View”). Both documents have been deliberated and adopted by the Executive Board of IMF，representing IMF’s official and authoritative opinions. By exploring the evolution of IMF’s policy on cross-border capital flows since its establishment，this report sheds light on the in-depth understanding of the profound changes in the international policies，and China’s managed RMB convertibility.

IMF believes that the use of management on capital inflow surges can be in a preemptive manner

The Review sticks to the core principles of IMF’s cross-border capital management since 2012. The Institutional View held that inflow surges can pose macroeconomic challenges and raise risks of financial instability in target countries. During a capital reversal，policy tools should be deployed in order: macroeconomic adjustment measures，macro-prudential measures (MPMs)，and capital flow management measures (CFMs) if necessary. This was restated in IMF’s 2016 review of the Institutional View. This time，in addition to reaffirming the risks of inflow surges，the Review also expounds on the timing and coordination of policy tools.

The Review points out that cross-border inflow surges can be managed preemptively. The Institutional View focused on risk mitigation after inflow surges. The Review holds that if currency mismatches arising from the accumulation of external debt have the potential to induce inflow surge risks，member states can deploy measures to manage the cross-border capital flows in a preemptive manner.

The Review clarifies four circumstances constituting CFMs，where a state can use CFMs in accordance with international standards which may be assessed as inconsistent with the Fund’s framework. First，measures based on national security needs. Second，measures implemented in accordance with the prudential standards of the Basel Framework. Third，measures that comply with international anti-tax evasion standards. Fourth，measures of anti-money laundering and combating the financing of terrorism.

Evolution of the IMF’s policy orientation on cross-border capital flows

Since its inception，IMF has significantly changed its policy orientation on cross-border capital flow management as the corresponding global landscape keeps changing. The policy adjustments have undergone a few stages: allowing capital controls，advocating capital flow liberalization，allowing temporary capital controls in times of crisis， recognizing post-inflow surge management and recommending preemptive capital inflow management.

When the IMF was established，it gave member states the right to capital controls. In 1941，Keynes drafted the “Keynes Plan”. The plan encouraged the removal of trade barriers，believing that capital flows could destabilize the economy and recommending that countries implement their own capital control measures. In 1944，the United Nations Monetary and Financial Conference adopted The Articles of Agreement of the International Monetary Fund (hereinafter referred to as “the Agreement”) and set up the International Monetary Fund. IMF incorporated some recommendations from the Keynes Plan and encouraged current account convertibility. Article VIII of the Agreement requires States to enable free convertibility of the current accounts. At the same time，IMF allowed capital controls to uphold the independence of each nation’s monetary policies under a fixed exchange rate regime. Section 3 of Article Ⅵ states that “Members may exercise such controls as are necessary to regulate international capital movements.”