Central Bank Should Tighten Capital Control Without Interfering in Forex, Ex-PBOC Economist Says

Yicai

2016-12-06

(Yicai Global) Dec. 6 -- China’s central bank should tighten up capital control and stop interfering in the foreign exchange market at the same time, Yu Yongding, a former economist who served on the People’s Bank of China’s monetary policy committee, suggested in a recent speech.

“China’s capital account is already fairly deregulated due to the process of globalization, however many loopholes in capital regulation still remain to be closed up, which requires capital control to be tightened up to the greatest extent possible,” Yu advised.

The People’s Bank of China have already introduced a series of regulatory measures, Yu said, which is completely correct. Although the measures brought many adverse effects, the current situation, with a weak yuan and capital flows, leaves China with no other options.

“China should stop interfering in the foreign exchange market while tightening up control on capital movements. Exchange rates are prices by nature and price fluctuations have an impact on production. But the impact is rather insignificant relative to foreign exchange reserves, because that’s where the money is.” Yu said.

“China’s foreign exchange reserves shrank by around USD800 billion in the last couple of years and the situation has not changed. The USD is still rising and capital flight in China has not been reversed. It poses a serious threat,” he said.

“We need to calm down about the yuan’s devaluation and should not worry too much about it. If we manage to pull through, the devaluation of the yuan will prove highly beneficial to industry restructuring and foreign trade development in China over the longer term.” Yu added.