Financial markets need more clarity on how Chinese authorities are managing their currency, particularly the relationship of the yuan to the US dollar, IMF managing director Christine Lagarde said on Saturday.
Sharp swings in the yuan have contributed, along with a dramatic fall in the price of oil, to global market volatility since the beginning of this year.
Bank of Japan Governor Haruhiko Kuroda, speaking on the same panel at the World Economic Forum in Davos, said he believed China should use capital controls to stabilize its currency while keeping domestic monetary policy loose.
Asked whether she would back capital controls by China for a period, Lagarde avoided a direct reply, but said: “Certainly a massive use of reserves would not be a particularly good idea... Some of it was already used.”
China is burning through its reserves as it tries to prop up its currency. China’s stockpile plunged US$513 billion last year to US$3.33 trillion, the first annual decline since 1992 and the holdings are to drop to US$3 trillion or less by the end of this year, according to the median of 12 forecasts in a Bloomberg News survey this month. They were projected to tumble further to US$2.66 trillion by the end of next year.
China has already tightened some capital controls, requiring lenders in offshore yuan-trading centers to lock away more funds in their latest efforts to combat capital outflows. It also suspended some foreign lenders from conducting some cross-border yuan operations and cracked down on illegal money transfers.
Lagarde said that the market needed “clarity and certainty” about China’s exchange rate basket “in particular with reference to the dollar, which has always been the reference.”
“That would be the right move to make,” she added.
Kuroda said China was right to keep monetary policy accommodative to help cushion the country’s transition from an export-led industrial economy to a demand-driven consumer economy without excessive depreciation of the yuan.
“This is my personal view and may not be shared by Chinese authorities, but in this kind of contradictory situation, capital control could be useful to manage exchange rate, as well as domestic monetary policy in a consistent, appropriate way,” Kuroda said.
He said Beijing was struggling to avoid either an excessive depreciation or an excessive appreciation of its currency.
Chinese economic data signaling slowing growth in the world’s second-largest economy have sent global investors into a panic in the first three weeks of this year, with oil prices also plunging as a result of oversupply in the market.
Credit Suisse Group AG CEO Tidjane Thiam told the Davos panel that many people in the markets did not necessarily believe China’s official growth figure of 6.9 percent for last year and feared the Chinese economy was facing a “hard landing.”
“We believe China will have a soft landing, not a hard landing. A lot in people in the market believe demand in China is decreasing. We don’t agree,” he said.
Part of the market slide was due to massive distressed sales of assets by sovereign wealth funds and asset managers prompted by falling oil prices, Thiam added.
Both Lagarde and Kuroda suggested investors could trust China’s official growth data.
The Chinese central bank has been generous with liquidity, pumping a net 315 billion yuan (US$47.9 billion) into the banking system ahead of the Lunar New Year holiday early next month.
It was the biggest weekly injection since January 2014 and analysts suspected it was larger than warranted to avoid any hint of a cash crunch during the long holiday.
According to sources, People’s Bank of China (PBOC) Assistant Governor Zhang Xiaohui (張曉慧) said it would not rush to cut the amount of cash banks must hold in reserves, as doing so could send a strong signal on policy easing.
PBOC Deputy Governor Yi Gang (易綱) also said it would keep the yuan basically stable against a basket of currencies.
Italian Minister of Economy and Finances Pier Carlo Padoan told reporters the IMF board’s decision to include China’s yuan in the basket of major currencies used to calculate the special drawing rights, from which the IMF lends to members, was “an additional positive constraint” on China’s management of its currency.
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