China has tightened some administrative measures in order to reduce outflow pressure. There has been some success in this, most obviously in the area of net RMB outflows, which shrank in December following increases for most of the year.
Despite this outflows have persisted. The risk is new measures will raise concerns of more restrictions or actual imposition of capital controls, prompting an acceleration of outflows.
THE TIME HAS COME
Maintaining further stability in the RMB Index would mean further declines in China’s FX reserves, or more stringent measures to curb outflows. Either that or allow the RMB to adjust more freely, which would mean letting it weaken further. This is a choice policymakers need to make.
In our view, allowing the RMB to weaken further is the more appropriate path to take. Chinese residents and corporates need to learn to adapt and live with greater volatility in their currency.
In any case, as a net creditor to the world (with China’s net international investment position at $US1,747 billion at the end of the third quarter of 2016, or 15.7 per cent of GDP) a weaker RMB boosts the value of the country’s foreign assets.
Allowing further erosion of FX reserves or introducing more administrative measures runs the risk foreign investors lose confidence in RMB as a global currency.
Khoon Goh is Head of Asia Research at ANZ