China should seize the moment to free up controls on the yuan to expand its international use
- The dangers of capital outflow have eased as China’s economy has recovered rapidly from the impact of the coronavirus pandemic
- The yuan has become a safe bet for value due to a weaker US dollar, but Beijing still maintains tight control of capital flows
For the last five years, China’s central bank has been fighting to defend two key numbers: seven and three. Seven refers to the exchange rate between yuan and the US dollar – if the yuan weakens too much beyond seven to the US dollar, it would be regarded as a dangerous sign. Three refers to the level of China’s stockpile of foreign exchange reserves – if reserves dip below US$3 trillion, it would be seen as a sign of weakness.
The context for the unannounced campaign to defend the two key figures is a deep concern over the rapid capital exodus that occurred after the sudden change in perceptions about China’s financial health and economic robustness following a devastating stock market rout in the summer of 2015, and Beijing’s subsequent clumsy steps to devalue the yuan by nearly 2 per cent.
The restrictions on the ability of ordinary Chinese people to access foreign exchanges increased significantly, even though, on the surface, China maintains a policy that every citizen is entitled to buy up to US$50,000 worth of foreign currencies every year.
With a lopsided foreign exchange policy of encouraging inflows and discouraging outflows, China has achieved its goal of avoiding a large yuan depreciation or an exodus of funds.