China has room to start easing policies curbing capital flight.
Foreign exchange reserves have stabilized at $3.1 trillion, outflows have stabilized and the currency has rallied. That is thanks to the United States dollar’s plunge – a trend exacerbated by the disarray of the Trump administration – and a far stronger domestic economy.
If Beijing wants to attract more foreign money into mainland stocks and bonds, it might be time to start selectively relaxing cross-border curbs.
The Chinese government still looks tense. Officials are pursuing banks and corporations for violating foreign exchange regulations, and investigations are reportedly underway into big offshore investments by private companies. There are signs that capital is still sneaking out of China through disguised channels like tourism spending. Thus the only currency liberalization under consideration is a widening of the yuan’s trading band, a move that would make no practical difference.
But conservatism is not costless. China wants more overseas money in the debt markets, to lift the pressure on domestic banks, introduce more market discipline and push the internationalization of its currency. Capital controls deter otherwise enthusiastic foreign institutions from investing. Lifting them would help convince skeptics that Beijing is ready to resume reform. It would also serve as a sign of confidence that might dissuade Chinese onlookers from rushing for the exits before they close even tighter.
To be sure, some caution is warranted. If the United States economy keeps heating up, the Federal Reserve may increase interest rates aggressively, and the dollar could rise again. Alternatively, a disaster — like a war with North Korea — could set off a flight to dollar safety.
But even if the dollar were to strengthen again, that would not necessarily result in another round of panicked outflows. Many of the worries that aggravated capital flight in 2016 have since eased. Producer prices, industrial profits, private investment and market interest rates are all rising.
The stock market is snortingly bullish; the benchmark Shanghai stock index is up more than 12 percent this year. And in any case, the Trump era is damaging the dollar’s status as a safe-haven currency. This year, it’s the euro that is rallying.
If Beijing believes this economic upturn is durable, there is a window of opportunity to reopen the capital doors.