Economists defend China currency policy

Capital-control measures seen as no permanent fix for disorderly outflow

Chinese and US economists agreed that having a relatively stable renminbi exchange rate is both in China’s and the world’s interest.

Ha Jiming, a former senior executive with Goldman Sachs, noted that China’s current account surplus is declining in percentage relative to GDP but still quite sizable, while its capital account is experiencing significant outflow pressure.

“We need to make both a shortterm and long-term judgment on the viability of the capital control measures,” Ha said on Thursday at the Peterson Institute for International Economics (PIIE) in Washington, in a talk on US-China cooperation in a changing global economy.

PIIE and CF40, a think tank in China of which Ha is a founding member, recently released a paper on the same topic covering not only the exchange rate policy, but also bilateral investment, regional economic integration and the impact on China of US President Donald Trump’s economic policies.

Ha, a former chief economist and managing director of China International Capital Co Ltd, believes that in the short term, capital control in China could play a role in deterring disorderly capital outflow, but added that in the longer term, it should not be put in place forever. “It actually distorts resource allocation,” he said.

China’s foreign currency reserves sustained a sharp drop in 2016 due to capital outflow and government sales from currency reserves to prevent the renminbi, or yuan, from falling. The reserves have stabilized this year.

Ha, however, believes that China should press ahead with reforms to pave the way for capital account liberalization.

“It’s actually enshrined in PBOC’s (central bank) policy. It’s also enshrined in the Communist Party’s 18th Congress: ‘Let the market play a decisive role,’” he said.

Joseph Gagnon, a senior fellow at the PIIE, cautioned that financial markets often get things wrong. “I think it would be good to put some buffers or dampers on that,” he said.

Gagnon, a former US Federal Reserve official, believes that China is doing exactly that, though maybe not for exactly the reasons he would have.

“If you imagine a huge outflow of private capital from China causes a massive fall of the renminbi, massive trade surplus again, I think the rest of the world, especially now, would have trouble with that,” he said.

Adam Posen, president of the PIIE, agreed, saying that “it’s in China’s own interest, as well as the world’s, to have a relatively stable currency.”

“And the imbalance should not be allowed to get way out of whack,” he said.

The US Treasury Department determined in its April report that China has not been manipulating its currency. Secretary Steven Mnuchin also described China’s intervention to prevent the renminbi from falling as helping US competitiveness.