BREAKINGVIEWS-Strong yuan opens window to rethink forex controls

Reuters




(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Pete SweeneyHONG KONG, Aug 8 (Reuters Breakingviews) - China has room to
start easing policies curbing capital flight. Foreign exchange
reserves have stabilized at $3.1 trillion, outflows have
stabilised and the currency has rallied. That's thanks to the
dollar's plunge - a trend exacerbated by the antics of the Trump
administration - and a far stronger domestic economy. If Beijing
wants to attract more foreign money into mainland stocks and
bonds, it might be time to start selectively relaxing
cross-border curbs.
    Graphic: Chinese foreign exchange reserves have stabilised
and the yuan has rallied against the dollar: http://reut.rs/2fo8geA
    The government still looks tense. Officials are pursuing
banks and corporations for violating foreign exchange
regulations; investigations are reportedly underway into big
offshore investments by private companies. There are signs
capital is still sneaking out of China through disguised
channels like tourism spending. Thus the only mooted currency
liberalisation is a widening of the yuan's trading band, a move
that would make no practical difference.
    But conservatism is not costless. China wants more overseas
money in the debt markets, to lift the pressure on domestic
banks, introduce more market discipline, and push the
internationalisation of its currency. Capital controls deter
otherwise enthused foreign institutions from investing. Lifting
them would help convince sceptics that Beijing is ready to
resume reform. It would also serve as a sign of confidence that
might dissuade Chinese onlookers from rushing for the exits
before they close even tighter.
    To be sure, some caution is warranted. If the U.S. economy
keeps heating, the Federal Reserve might hike rates
aggressively, and the greenback could rise again. Alternatively
a disaster - like a war with North Korea - could set off a
flight to dollar safety.
    But even if the dollar were to strengthen again, that would
not necessarily result in another round of panicked outflows.
Many of the worries that aggravated capital flight in 2016 have
since eased. Producer prices, industrial profits, private
investment and market interest rates are all rising. The stock
market is snortingly bullish, with the benchmark CSI300 index up
more than 12 percent this year. And in any case, the Trump era
is damaging the dollar's status as a safe-haven currency. This
year, it's the euro that is rallying.
    If Beijing believes this economic upturn is durable, there
is a window of opportunity to reopen the capital doors.
    On Twitter https://twitter.com/petesweeneypro

    CONTEXT NEWS
    - China's foreign exchange reserves rose $24 billion to $3.1
trillion in July, beating forecasts.
    - The yuan has risen more than 3 percent against the dollar
in 2017, as the dollar weakened against a range of currencies.
    - The appreciation of other currencies against the dollar
helped boost the value of Beijing's foreign exchange reserves,
the forex regulator said on Aug. 7.
    - Commercial banks sold a net $93.8 billion of foreign
exchange in the first half of the year, down 46 percent from the
same period last year, indicating diminished demand for foreign
currency from Chinese corporations, official data shows.
    -  For previous columns by the author, Reuters customers can
click on [SWEENEY/]
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China July FX reserves unexpectedly hit 9-month high on boost
from weak dollar    [nL4N1KM1VZ]
China eyes widening yuan band amid reform pressures - sources
[nL3N1KG2DV]
BREAKINGVIEWS-Wanda's M&A punishment is too much, too late
[nL3N1K82PT]
BREAKINGVIEWS-China's revived economy rests on borrowed pillow
 [nL3N1K81HB]
Graphic: Chinese foreign exchange reserves have stabilised and
the yuan has rallied against the dollar    http://reut.rs/2fo8geA
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Quentin Webb and Katrina Hamlin)
 ((pete.sweeney@thomsonreuters.com; Reuters Messaging:
pete.sweeney.thomsonreuters.com@reuters.net))

Keywords: CHINA ECONOMICS/BREAKINGVIEWS






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