China must tread carefully when it comes to controlling the outflow of capital as it has the potential to make investors think authorities are concerned about the nation’s economy, the Reserve Bank of Australia governor Philip Lowe said.
The RBA boss said the internationalisation of the Chinese currency will be one of “biggest forces shaping the global financial system,”
China has instituted stricter capital controls to prevent citizens and corporations taking money out of the country amid concerns that unchecked capital outflows could be destabilising. The controls also were put in place to take the pressure off the yuan, which had the biggest slide in more than two decades.
“Short-term controls arguably can have a positive effect on financial stability in China by reducing the risk of a disorderly currency adjustment and pressures,” Lowe said.
“But there is a balance to be struck here. One consideration is the signal that a tightening of controls, after several years of liberalisation, could send to investors about how the government perceives the balance of risks facing the economy.”
Lowe also said a persistent tightening may “also exacerbate domestic vulnerabilities, by causing domestic liquidity to be greater than might be desired.”
Many countries have liberalised their capital accounts and made their exchange rates more flexible, though only few made that transition without at least some disruption to the domestic financial system, the governor said.
“China has the ambition of having a global currency,” Lowe said.
“The effects of this transition – involving the internationalisation of the RMB and the opening up of the capital account – could ultimately be as wide-ranging as were the effects of China’s ascension to the World Trade Organisation.”