Japan has told China it’s concerned about increased capital outflows from the country and that Beijing should move slowly in reforming its capital account.
Capital flight is in the hundreds of billions of dollars after a summer of market turmoil, according to Reuters.
At the same time, Beijing is drawing down heavily on its currency reserves to offset the impact of the money moving offshore.
The stock market slump of more than 40 percent in a matter of a few months and the shock devaluation of the yuan were a reminder of how quickly Beijing could lose control of its markets if it moves too quickly to open up to market forces, Japanese officials say.
“The pace of capital outflows is alarming,” said a senior official with knowledge of Japan’s currency diplomacy.
“If China’s financial system is destabilised, the effect on Japan and the rest of Asia would be enormous.”
Publicly, Japanese officials have urged China to proceed with reform and expressed confidence that Beijing has the tools and expertise to manage.
But privately, they have adopted a different tone, cautioning Beijing against moving too quickly to free up the yuan when large capital outflows could make the currency a target for speculators.
Japan has conveyed its concerns to Chinese officials at various meetings this year, including at the G20 financial leaders’ meeting in Turkey in September.
China took a big step towards internationalizing its currency on Friday when IMF staff and the institution’s head Christine Lagarde endorsed the inclusion of the yuan in the fund’s benchmark foreign exchange basket, known as Special Drawing Rights (SDR).
Analysts estimate inclusion could lead to demand for the yuan worth more than US$500 billion.
“It should be the other way around,” said a Japanese official, who declined to be identified because of the sensitivity of the matter.
“Reforms come first, then you debate whether the yuan can join the SDR.”
China is trying to engineer a shift in the economy away from manufacturing and towards consumption and services while promising to fully liberalise the yuan by 2020 — a goal some Japanese officials feel is too ambitious.
Japan’s cautious tone is at odds with the more robust calls from Washington — underlined last week with comments from US Treasury Secretary Jack Lew urging Beijing to press ahead with its reform plans.
But Japan’s views carry weight with Beijing which has long taken a close interest in how Japan emerged in the past three decades as a global economic power.
It views Japan’s handling of capital flows and the yen as key factors that led to its asset bubble blow-up in the early 1990s that led to nearly two decades of deflation Japan is still struggling to eradicate.
For decades, China’s main concern was the amount of foreign currency coming into the economy as it built a huge export engine.
But since China surprised world markets by devaluing its currency around 2 percent in August, net capital outflows have reached US$200 billion while Beijing appeared to have spent U$229 billion in foreign exchange intervention to prop up the yuan in the third quarter, a US Treasury Department report showed last month.
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