China needs open capital markets for yuan to become global currency, says IMF’s Gopinath

If China wants its yuan to become a globally used currency, Beijing should have open capital markets and full currency convertibility, the No. 2 official of the International Monetary Fund said on Tuesday.

IMF First Deputy Managing Director Gita Gopinath, speaking on the global lender’s new institutional view on capital flow measures at a Peterson Institute for International Economics event, said the History has shown that reserve currencies widely used in global trade transactions, such as the dollar and the British pound sterling, do not have capital restrictions, as China does.

“If a country aspires to become a global currency, then in that case you would need to have, you know, fully and freely mobile capital, full capital account liberalization, full exchange rate convertibility, that which is not the case now in China,” Gopinath said in response to a question about capital restrictions in China.

On March 30, the IMF updated its institutional guidelines on capital controls to allow the use of preventive measures to reduce the risks of sudden capital outflows causing financial crises or deep recessions.

Under the new guidance, countries would no longer have to wait for capital flows to materialize and can impose such measures to counter a gradual accumulation of foreign currency debt that is not backed by foreign exchange reserves or hedges.

Gopinath said some countries with fixed exchange rates might have more reason to use capital flow measures preemptively because they would have fewer tools to counter sudden capital outflows.

But she cautioned against using capital flow measures to achieve certain policy goals that are best managed with domestic tools, such as controlling a spike in property prices.

While house price increases are sometimes blamed on an influx of money from foreign buyers, housing bubbles are often due to other factors, such as too low interest rates or a lack of supply. adequate housing, she said.

The IMF would be “skeptical” of using capital inflow controls to discourage real estate investment by foreign buyers, she said, adding that such inflows should be so distorting as to pose a clear risk to macroeconomic stability.

“So we think you really have to deal with that using your national response tools, because that’s often the reason why you have unaffordable housing prices, and of course also the increase in housing supply. and so on,” Gopinath said. .

Capital flow measures should also not be used by countries to thwart unsustainable fiscal policies or to influence a country’s exchange rate to gain competitive advantage.

“It’s not about influencing your exchange rate to keep it low for competitiveness,” Gopinath said.