BoJ chief advises China to impose capital controls to defend yuan

Bank of Japan (BoJ) Governor Haruhiko Kuroda said China should impose capital controls to defend the yuan rather than keep burning through currency reserves.

As he and other international policy makers expressed confidence that the world's second largest economy will avoid a hard landing, Kuroda made his proposal on the final day of the World Economic Forum's annual meeting in Davos, Switzerland.

China is struggling to hold up the yuan as a slowing economy forces it to loosen monetary policy and prompts capital to flee. It now faces questions from investors over just how long it can keep deploying reserves to calm the yuan's volatility. "This is my personal view, and it may not be shared by the Chinese authorities, but in this kind of somewhat contradictory situation capital controls could be useful to manage the exchange rate as regards domestic monetary policy in a consistent and appropriate way," Kuroda said today.

China is burning through its reserves as it tries to prop up the currency. China's stockpile plunged $513 billion last year to $3.33 trillion, the first annual decline since 1992 and the holdings will drop to $3 trillion or less by the end of this year, according to the median of 12 forecasts in a Bloomberg News survey this month. They were projected to tumble further, to $2.66 trillion by the end of next year.

"The massive use of reserves would not be a particularly good idea," said International Monetary Fund Managing Director Christine Lagarde, who suggested China better clarify how it manages the yuan. China has already tightened some capital controls, requiring lenders in offshore yuan-trading centers to lock away more funds in their latest efforts to combat capital outflows.