Free flows of capital across borders can make the domestic financial market deeper and wider, increase liquidity, and facilitate price discovery, thus improving efficiency of resource allocation. At the same time, diversification by investing overseas can help raise investment returns for households, which would in turn help promote private consumption and support sustainable growth. For emerging markets in particular, participation of foreign financial institutions can speed up the  1  Kaminsky, G.L., C.M. Reinhart and C.A. Vegh (2004), "When it rains, it pours: procyclical capital flows and macroeconomic policies", NBER Working Paper, 10708. BIS Review 141/2008  1  learning process and facilitate the adoption of best international practices by the financial sector. Therefore, while a more liberal regime for capital flows could at times bring about negative impacts, the relevant response should not be to keep the capital account closed forever, but to find ways of effectively managing the potential risks. International experiences have provided some broad suggestions on how such risks could be managed. Foremost is the importance of appropriate sequencing between liberalising the capital account and other domestic reforms. Development of financial institutions and markets, enhanced macroeconomic stability, and proper risk management by banks and enterprises would help to increase the resilience of the domestic entities in dealing with volatile capital flows. In addition, prudential regulation and supervisory framework need to be established, in order to prevent excessive risk-taking by domestic financial institutions.
This conference series is also a good way to organise informed discussions on the Mainland's financial sector issues. The first part of the conference examines the experiences of Chile, India, Korea and Thailand in their capital account liberalisation, with the view of drawing useful lessons for Mainland China. The second part focuses on the Mainland, assessing the effectiveness of current policies in dampening the impact of capital inflows on the domestic economy, their costs, as well as policy options of outward investment. A final paper will gauge the current level of financial integration between the Mainland and Hong Kong, and discuss the policy implications. I am pleased that this conference has brought together a group of experienced researchers and policymakers from a wide range of central banks, international organisations and research institutes. As earlier noted, the recent global financial turmoil will probably turn out to be the most critical time in recent economic history which will shape future economic and policy thinking. I hope this conference can provide a useful platform for fruitful discussions on capital account liberalisation to enhance our understanding on the issue. I wish the conference great success. BIS Review 141/2008  3