A strong US dollar strength and rising US interest rates under President-elect Donald Trump would intensify pressure on capital outflows from China, forcing its policymakers 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, Bloomberg reports.
“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.”
Federal Reserve chairman Janet Yellen has indicated a rate hike could be appropriate “relatively soon” and investors anticipate Trump’s proposals to cut taxes and boost infrastructure will spur faster US growth and inflation.
At the same time, the record indebtedness of China’s companies limits the government’s ability to raise interest rates because doing so would increase the cost of repaying debt.
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.
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