Spectre of capital flight slows China FX reform drive
The Chinese government is charting a delicate course between liberalising its capital account over stages while attempting to prevent massive outflows of wealth. Photo: EPA
Long-time China watchers probably felt a sense of deja vu when HSBC’s chief China economist, Qu Hongbin, predicted last month that the yuan would be convertible within five years.
China has been thwarting such predictions since 1993, when it first formally adopted capital account convertibility as a long-term goal.
Consummate China insider Fred Hu, who stepped down as Goldman Sachs’ Greater China chairman in 2010 to launch a private equity fund, made a similar prediction in 2002, just before China’s last political leadership transition.
Market watchers remain bullish on capital account loosening - pointing to positive signals from the central bank - but the importance the political leadership places on the country’s foreign exchange reserves as a guarantor of economic stability remains a major obstacle.
Indeed, signs that outflows are accelerating have already provoked concern from policymakers.
“We shouldn’t interpret capital account convertibility as a free currency, with cross-border asset transfers without control,” People’s Bank of China’s (PBOC) Governor Zhou Xiaochuan told a forum in Hainan province on Monday.
“We will reserve the right to monitor and restrict capital flows in some sensitive areas,” Zhou said.