PBoC headache seen worsening next month
to protect themselves from devaluation, exacerbating downward pressure on the yuan. Bloomberg pic BEIJING: People’s Bank of China (PBoC) governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eightyear low. He could have an even bigger one next month.
That’s when a US$50,000 (RM222,500) cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise.
If just one per cent of China’s almost 1.4 billion people max out those limits, that’s an outflow of about US$700 billion — more than the estimated US$620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.
Middle class and wealthy Chinese have been converting money into other currencies to protect themselves from devaluation, exacerbating downward pressure on the yuan. Outflows could intensify if the Federal Reserve (Fed) interest-rate hikes fuel further US dollar appreciation.
That leaves Zhou in a bind identified by Nobel-prize winning economist Robert Mundell as the “impossible trinity” — a principle that dictates nations can’t sustain a fixed exchange rate, independent monetary policy, and open capital borders all at the same time.
“At a moment like this, you have to compare two evils and pick the lessworse one,” said George Wu, who worked as a PBoC monetary policy official for 12 years. “Capital free flow may have to be abandoned in order to maintain a relatively stable currency rate.”
China is moving further away from balance among trinity variables, at least temporarily, and “it may take a while before the situation stabilises” for the yuan and capital outflows, said Wu, who is now chief economist at Huarong Securities Co.
The global landscape complicates policy. Japan and Europe remain fragile, with negative policy rates. And in addition to a likely Fed hike in two weeks, the United States president-elect Donald Trump, who has criticised China’s trade and currency policy, takes office on January 20. Bloomberg