Despite the decline in China’s foreign exchange reserves since last year, which has been widely reported in the international media, monetary officials and specialists say there is no panicky capital flight, and the outflow of capital has not reached a level to warrant the government adopting restrictive measures.
Recently, the situation has been improving, and cross-border capital flows appear to be gradually becoming normal, they pointed out, citing data from the State Administration of Foreign Exchange.
“Cross-border capital flows are expected to be stable in general,” Wang Chunying, deputy director of the administration’s balance of payments department, said on March 22.
Recently released foreign exchange statistics give the policymakers confidence. The cross-border capital outflow has slowed remarkably for three consecutive months since December, as indicated by the narrowing trend of foreign exchange reserve reductions, the decline in net foreign exchange purchases from enterprises and individuals, and the gradual stabilization of the yuan-dollar exchange rate.
“It shows that the impact of the US Federal Reserve’s interest rate hikes in December have gradually lessened,” said Wang Yungui, director of policy and regulation for the administration.
Internationally, market expectations of the Fed further increasing interest rates in the near future have lowered, which is conducive to stabilizing capital flows. And domestically, the fundamentals of China’s economy remain sound and attractive to foreign capital.
In addition, the market has gradually adapted to reform of China’s exchange rate mechanism after fluctuations last year.
“The renminbi exchange rate formation mechanism has become more mature, with higher market acceptance than last year,” said Zhao Xijun, vice-dean of the School of Finance at Renmin University of China.
The market generally expects the Fed not to raise interest rates before June, although there is still concern about the impact of any unexpected move by the Fed on the foreign exchange market, as Patrick Harker, president of the Federal Reserve Bank of Philadelphia, has suggested that the Fed should consider further increases as early as April.
China’s foreign exchange regulator did not deny the pressure of the dollar flowing back into the United States due to the Fed interest rate hike. But Wang Yungui said it is a “normal periodic reaction” considering the massive US dollar inflows into China and other emerging-market economies in the past few years.
“We don’t speculate about the timing of the Fed interest rate hike,” he said. “We believe China’s existing foreign exchange toolbox is sufficient, and the scale of the capital outflow is expected to be affordable.”
At the end of February, China had $3.2 trillion in foreign exchange reserves, he said, adding that the $790 billion foreign exchange decline since June 2014 is affordable.
Guo Tianyong, head of the China Banking Research Center at the Central University of Finance and Economics, agreed that China’s foreign exchange policy should consider more about its own situation rather than sticking to the Fed.
“As long as China’s domestic economic growth stays sustainable and stable, which guarantees higher returns on invested capital than the global level, we don’t have to worry about capital flight too much,” he said.
But the Chinese authorities are considering new foreign exchange administration tools, in particular a Tobin tax, or currency transaction tax, to curb short-term currency speculation. Wang Yungui confirmed last week that the authorities are studying the possibility of launching a Tobin tax.
Nobel laureate James Tobin first put forward the idea of the tax in 1972. It is a levy on currency transactions that increases speculators’ transaction costs and thereby discourages short-term speculation, which has been adopted by some Latin American countries.
Guo suggested the authorities be cautious in introducing a Tobin tax because the nature of the tax goes against the orientation of China’s market-oriented reform.
“It should be imposed only when market fluctuations greatly threaten the government’s ability to maintain stability on a macroeconomic level,” he said.
Zhao said a Tobin tax will not be implemented anytime soon because it is a comprehensive institutional arrangement that requires a longtime process of research, consultation and implementation.
In addition, he said, any measure that aims to increase transaction costs should avoid negative effects on normal investment and trade or the openness of China’s financial markets, which is directly related to internationalization of the renminbi.
Compared with a Tobin tax, it is better to make efforts to crack down on illegal capital outflows through foreign exchange supervision and monitoring, he added.