Currency floating looms if capital controls fail – Victor Shih

A strengthening US dollar since the election of US president-elect Donald Trump might increase the outflow pressure of the Renminbi, and China might first try more stricter measures to increase capital control, says financial specialist Victor Shih to Bloomberg. But if that fails, financial authorities might consider a more uncontrolled floating currency to get the market into balance.

Bloomberg:

Dollar strength and rising U.S. interest rates under President-elect Donald Trump would intensify pressure on capital outflows from China, forcing its policy makers to choose between tightening capital controls or a drastic floating of the currency in coming months.

That’s according to Victor Shih, a University of California at San Diego professor who studies China’s government and finance and specializes in tracking politics at the most elite level.

“Given the Chinese government’s consistent preference for control, we may see much more Draconian capital controls before a decision to float the currency can be made,” Shih said in an interview in Beijing. “The main objective is to avoid a panicky float.”…

China may face a stark choice between abandoning recent policy changes to tie the yuan more to a basket of currencies and letting it float more freely or stringent capital controls sometime in the next six to 18 months, said Shih.

The Communist Party’s preference for control suggests economic reform is unlikely to accelerate, Shih said. He sees China following Russia toward slower growth and rising currency volatility.