Capital controls could help China control the massive outflows of hot money from its economy and stabilize its currency, the Japanese central bank governor said on Saturday.
China suffered almost $700 billion of capital flight in 2015 according to the Institute of International Finance. Companies rushed to repay oversees loans as the yuan depreciated and global markets grew increasingly worried about the country’s economic slowdown and Chinese authorities’ interventions in the financial markets.
Haruhiko Kuroda, who headed the Asian Development Bank prior to his leadership of the Bank of Japan, said that Chinese authorities were struggling to stabilize the yuan while maintaining an accommodative monetary policy stance.
“In this kind of somewhat contradictory situation, capital controls could be useful to manage the exchange rate, as well as the domestic monetary policy, in a consistent and appropriate way,” Kuroda said at a World Economic Forum panel discussion on Saturday in Davos, Switzerland.
Capital controls would be controversial, following the International Monetary Fund (IMF)’s decision to admit the yuan into its reserve currency basket last year. This was on the grounds that it had become a “freely usable” currency – which capital controls could impede.
China could also try to support its currency by buying foreign currencies in order to pressure the exchange rate with the yuan.
“I don’t think the massive use of reserves would be a particularly good idea,” IMF Managing Director Christine Lagarde said at Saturday’s panel discussion.
“I think that some of the macroprudential measures that were adopted in the last few weeks were justified and were probably useful in the context of the current monetary policy questions that the authorities have to ask themselves,” she later added.
Concerns about China’s handling of its financial markets have continued since last summer, when policymakers began intervening in equity markets and devalued the yuan amid a stock market rout. Chinese authorities’ limited explanation of policy moves aggravated fears.
An investor walks past an electronic screen showing stock information at a brokerage house in Nanjing, Jiangsu province, January 19, 2016.
This week at Davos, Lagarde has called on Chinese authorities to reassure markets by clarifying their policy intentions.
“What is necessary for markets is clarity, certainty, one message. And on that front, clarifying precisely how the exchange rate mechanism works and against which basket of currencies – as opposed to the dollar, which is always the reference that is still made as far as the variation of the renminbi –would be a right move,” she said on Saturday.
Chinese stocks have posted further losses this year, as a result of weak manufacturing surveys, the further depreciation of the yuan and the introduction of circuit breakers in the stock market.
The country posted economic growth of 6.9 percent in 2015, in line with the IMF’s expectations, but official Chinese data is believed by many to be exaggerated.
The Shanghai Composite index has declined by around 12.8 percent since the start of 2016.
On Saturday, Credit Suisse CEO Tidjane Thiam said that global financial markets had suffered the worst-ever start to a year in 2016, partially as a result of China fears, which he said were exaggerated.
“We actually believe that China, you know, will have a soft landing. We are not concerned, fundamentally, about Chinese growth,” he said at the Davos panel.
U.K. Chancellor of the Exchequer George Osborne, who has strived to put Britain at the forefront of China-Europe business ties, emphasized the importance of continuing to welcome China into global economic and political institutions.
“It is hugely in our interest that China feels part of the global system and that that system works for them. And so we must be in it for the long haul as this extraordinary society grows and transforms,” he said on Saturday at the Davos panel.