The framework for the legal regulation of cross-border capital flows is critically important yet remains vastly unexplored and undeveloped. The preface introduces the background on the issue and explains how the book aims to fill the void and contribute detailed legal analysis to the ongoing discussion and debate. In contrast with existing literature, this book does not focus on the utility of capital flow management measures (CFMs) but on legal issues of fragmentation and associated problems. Much of the existing literature starts with the premise that members should have an absolute right to maintain CFMs – as a result, over-reading and misinterpreting of provisions is rife. This book has no pre-conceived ideological viewpoint but instead seeks to provide solid analysis on the consistency of CFMs with the trade and investment regimes and to develop a framework to manage and avoid regime conflict in existing and future treaties.

With cracks in the liberalisation approach to capital flows appearing during the Asian Financial Crisis and subsequent crises in the early 2000s, policymakers and commentators began to understand that unregulated finance and cross-border flows could generate extreme financial instability. Capital controls have become widespread. For some, the controls are limited in nature and duration, but for others the controls are widespread and remain in place for an extended period. This shift has occurred at the same time the IMF has been more accepting of CFMs and in particular shifted its position on the extent to which they can be a source of instability in emerging markets. This chapter focuses on the role and legitimacy of CFMs. The chapter first provides a definition of CFMs and explains their role and impact in terms of capital flow management. Next, the chapter explains why CFMs are so controversial and elaborates on their operational aspects and overall desirability. The chapter concludes with a discussion on why CFMs remain difficult to manage from a macro level in the absence of a global regulatory framework.

This chapter sets the scene after the war. Sterling was under heavy capital controls. The currency was still the second most important currency. But it was barely an international currency, burdened by many regulations.

Speculation has been mounting that the digital yuan will be used to displace the US dollar and circumvent sanctions. In retaliation, financial institutions can be targeted whereby US dollar payment or financial system access can be sanctioned. If the United States weaponizes the dollar, the digital yuan will not provide sanction protection beyond the status quo. The digital yuan’s true innovation is the ability to manage capital controls and facilitate financial liberalization. Being a programmable currency, the digital yuan enables Mainland China to open its economy more expeditiously than would normally be possible, while providing the regulatory levers to manage monetary and financial stability. Mainland technology companies are instrumental in the circulation of the digital yuan through electronic payment platforms. These same technology companies have recently established virtual banks and stored value facility payment platforms in Hong Kong. This chapter argues that technology is introducing new risks into Hong Kong’s banking system which pose a material risk to financial stability. To manage these risks, financial data supervision and infrastructure is required which currently does not exist. With the recent growth surge and volatility in cryptocurrency markets, the current approach of neglecting financial stability supervision is erroneous and reckless.

This chapter provides an introduction to global capital flows. It considers four types of flows: foreign direct investment, equity investment, bond finance, and commercial bank lending. It considers the determinants of these four types of capital flows. It takes up the issues of net versus gross flows, capital account liberalization, and the application of capital controls.